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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
Applications of comparative advantage 60 The variety of demand curves 100
Should Roger Federer mow his own lawn? 60 FYI: The midpoint method: A better way to calculate
Should Australia trade with other countries? 61 percentage changes and elasticities 102
In the news: Who has a comparative advantage in Total revenue and the price elasticity of demand 103
slaying ogres? 62 Case study: Pricing admission to an art gallery 105
Conclusion 63 Elasticity and total revenue along a linear demand
curve 105
Summary 64
Other demand elasticities 107
Key concepts 64 The elasticity of supply 108
Questions for review 64 The price elasticity of supply and its determinants 108
Multiple choice 64 Computing the price elasticity of supply 108
Problems and applications 65 The variety of supply curves 109
Three applications of supply, demand and elasticity 109
Part 2 Supply and demand I: How markets Can good news for farming be bad news for farmers? 111
work 68 Why did OPEC fail to keep the price of oil high? 113
Do drug bans increase or decrease drug-related
Chapter 4 The market forces of supply and
crime? 114
demand 70
Conclusion 116
Markets and competition 71
Summary 117
What is a market? 71
Key concepts 117
What is competition? 71
Demand 72 Questions for review 117
The demand curve: The relationship between price and Multiple choice 118
quantity demanded 72 Problems and applications 118
Market demand versus individual demand 74
FYI: Ceteris paribus 75 Chapter 6 Supply, demand and government
Shifts in the demand curve 76 policies 121
Case study: Are smartphones and tablets substitutes or Controls on prices 122
complements? 77 How price ceilings affect market outcomes 122
Case study: Two ways to reduce the quantity of smoking Case study: Lines at the petrol station 124
demanded 78 Case study: Rent control in the short run and long
Supply 80 run 125

CONTENTS
The supply curve: The relationship between price and How price floors affect market outcomes 126
quantity supplied 80 Case study: Minimum wage rates 128
Market supply versus individual supply 81 What Australian economists think 130
Shifts in the supply curve 82 Evaluating price controls 130
Supply and demand together 85 Taxes 131
Equilibrium 85 How taxes on sellers affect market outcomes 132
Three steps for analysing changes in equilibrium 87 How taxes on buyers affect market outcomes 133
Conclusion: How prices allocate resources 90 Case study: Who pays the payroll tax? 135
In the news: Mother Nature shifts the supply curve 92 Elasticity and tax incidence 136
Summary 93 Subsidies 137
Key concepts 93 How subsidies affect market outcomes 138
Case study: Who gets the benefits from the First Home
Questions for review 93 Owner Grant scheme? 140
Multiple choice 94 What Australian economists think 141
Problems and applications 95 Conclusion 141
Summary 142
Chapter 5 Elasticity and its application 97
Key concepts 142
The elasticity of demand 98
Questions for review 142
The price elasticity of demand and its determinants 98
Computing the price elasticity of demand 99 Multiple choice 143
FYI: A few elasticities from the real world 100 Problems and applications 143

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 Chapter 9 Application: International trade 192
Part 3 Supply and demand II: Markets and
welfare 146 The determinants of trade 193
The equilibrium without trade 193
Chapter 7 Consumers, producers and the
The world price and comparative advantage 194
efficiency of markets 148
The winners and losers from trade 195
Consumer surplus 149
The gains and losses of an exporting country 195
Willingness to pay 149
The gains and losses of an importing country 198
Using the demand curve to measure consumer
The effects of a tariff 200
surplus 150
FYI: Import quotas: Another way to restrict trade 202
How a lower price raises consumer surplus 153
The lessons for trade policy 202
What does consumer surplus measure? 153
Other benefits of international trade 203
Case study: How parking meters help you find a parking
In the news: Trade as a tool for economic
space 155
development 204
Producer surplus 156
The arguments for restricting trade 205
Cost and the willingness to sell 156
The jobs argument 206
Using the supply curve to measure producer surplus 157
The national security argument 206
How a higher price raises producer surplus 158 In the news: Should the winners from free trade
Market efficiency 160 compensate the losers? 207
The benevolent social planner 160 The infant industry argument 208
Evaluating the market equilibrium 161 The unfair competition argument 208
Case study: Should there be a market for organs? 163 The protection-as-a-bargaining-chip argument 208
Conclusion: Market efficiency and market failure 164 Case study: Trade agreements and the World Trade
Summary 166 Organization 209
Conclusion 210
Key concepts 166
What Australian economists think 211
Questions for review 166
Summary 212
Multiple choice 166
Key concepts 212
Problems and applications 167
Questions for review 212
Chapter 8 Application: The costs of Multiple choice 212
taxation 170 Problems and applications 213
The deadweight loss of taxation 171
CONTENTS

How a tax affects market participants 171 Part 4 The economics of the public sector 216
Deadweight losses and the gains from trade 175
The determinants of the deadweight loss 176
Chapter 10 Externalities 218
Case study: The deadweight loss debate 178 Externalities and market inefficiency 220
Deadweight loss and tax revenue as taxes vary 179 Welfare economics: A recap 220
Case study: The Laffer curve and supply-side Negative externalities 220
economics 181 Positive externalities 222
Conclusion 183 Case study: Technology spillovers, industrial policy and
patent protection 223
Summary 184 What Australian economists think 224
Key concept 184 Public policies on externalities 225
Questions for review 184 What Australian economists think 225
Multiple choice 184 Command-and-control policies: Regulation 225
Problems and applications 185 Market-based policy 1: Corrective taxes and
subsidies 226
Appendix 188
Case study: Taking out the garbage 227
The welfare economics of subsidies 188 Market-based policy 2: Tradeable pollution permits 228
The cost of a subsidy 189 Case study: British Columbia adopts a broad-based
The deadweight loss from a subsidy 190 carbon tax 229
Understanding the deadweight loss from What Australian economists think 231
overproduction 191 Objections to the economic analysis of pollution 231

viii
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Private solutions to externalities 232 Tax incidence and tax equity 273
The types of private solutions 232 Case study: Who pays company income tax? 273
The Coase theorem 232 Conclusion: The trade-off between equity and
Why private solutions do not always work 233 efficiency 274
Conclusion 234 Summary 275
Summary 235 Key concepts 275
Key concepts 235 Questions for review 275
Questions for review 235 Multiple choice 275
Multiple choice 235 Problems and applications 276
Problems and applications 236
Part 5 Firm behaviour and the organisation
Chapter 11 Public goods and common of industry 278
resources 239
Chapter 13 The costs of production 280
The different kinds of goods 240
What are costs? 281
Public goods 242
Total revenue, total cost and profit 281
The free-rider problem 242
Costs as opportunity costs 282
Some important public goods 243
The cost of capital as an opportunity cost 282
Case study: Are lighthouses public goods? 244
Economic profit versus accounting profit 283
The difficult job of cost–benefit analysis 245
Case study: How much is a life worth? 246 Production and costs 284
Private provision of public goods 247 FYI: How long is the long run? 284
Case study: Is music a public good? 248 The production function 285
Common resources 249 From the production function to the total-cost curve 287
The Tragedy of the Commons 249 The various measures of cost 288
Some important common resources 250 Fixed and variable costs 289
In the news: The case for toll roads 251 Average and marginal cost 290
What Australian economists think 253 Cost curves and their shapes 290
Case study: Why the cow is not extinct 254 Typical cost curves 292
Conclusion: The importance of property rights 255 Costs in the short run and in the long run 294
Summary 256 The relationship between short-run and long-run average
Key concepts 256 total cost 294

CONTENTS
Economies and diseconomies of scale 295
Questions for review 256
Conclusion 296
Multiple choice 256
FYI: Lessons from a pin factory 296
Problems and applications 257 Summary 298
Chapter 12 The design of the tax system 260 Key concepts 298
An overview of Australian taxation 261 Questions for review 298
Taxes collected by the federal government 261 Multiple choice 299
Taxes collected by state and local governments 264 Problems and applications 299
Taxes and efficiency 265
Deadweight losses 265 Chapter 14 Firms in competitive markets 303
Case study: Should income or consumption What is a competitive market? 304
be taxed? 266 The meaning of competition 304
Administrative burden 267 The revenue of a competitive firm 305
Marginal tax rates versus average tax rates 267 Profit maximisation and the competitive firm’s supply
Lump-sum taxes 268 curve 306
Taxes and equity 269 A simple example of profit maximisation 306
The benefits principle 269 The marginal-cost curve and the firm’s supply
The ability-to-pay principle 270 decision 307
Case study: How the tax burden is distributed 271 The firm’s short-run decision to shut down 309
Case study: Who should pay for higher education? 272 FYI: Spilt milk and sunk costs 310

ix
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 Case study: Near-empty restaurants and off-season Chapter 16 Monopolistic competition 356
ski lodges 311 Between monopoly and perfect competition 357
The firm’s long-run decision to exit or enter a market 312
Competition with differentiated products 359
Measuring profit in our graph for the competitive firm 313
The monopolistically competitive firm in the short run 359
The supply curve in a competitive market 314
The long-run equilibrium 360
The short run: Market supply with a fixed number of
Monopolistic versus perfect competition 362
firms 315
Monopolistic competition and the welfare of society 364
The long run: Market supply with entry and exit 315
Advertising 365
Why do competitive firms stay in business if they make
zero profit? 317 The debate about advertising 365
A shift in demand in the short run and long run 317 Case study: Advertising and the price of glasses 366
Why the long-run supply curve might slope upwards 319 Advertising as a signal of quality 367
Brand names 368
Conclusion: Behind the supply curve 320
Conclusion 369
Summary 321
Summary 371
Key concepts 321
Key concepts 371
Questions for review 321
Questions for review 371
Multiple choice 321
Multiple choice 371
Problems and applications 322
Problems and applications 372
Chapter 15 Monopoly 326
Chapter 17 Oligopoly and business
Why monopolies arise 327
strategy 375
Monopoly resources 328
Case study: The gas industry in south-eastern Markets with only a few sellers 376
Australia 328 A duopoly example 377
Government-created monopolies 329 Competition, monopolies and cartels 377
Natural monopolies 329 The equilibrium for an oligopoly 378
How monopolies make production and pricing How the size of an oligopoly affects the market
decisions 331 outcome 379
Case study: OPEC and the world oil market 380
Monopoly versus competition 331
A monopoly’s revenue 332 The economics of cooperation 381
Profit maximisation 334 The prisoners’ dilemma 382
CONTENTS

FYI: Why a monopoly does not have a supply curve 336 Oligopolies as a prisoners’ dilemma 383
A monopoly’s profit 336 Other examples of the prisoners’ dilemma 384
Case study: Monopoly pharmaceuticals versus generic The prisoners’ dilemma and the welfare of society 385
pharmaceuticals 337 Why people sometimes cooperate 386
The welfare cost of monopoly 338 Case study: The prisoners’ dilemma tournament 387
The deadweight loss 339 Conclusion 388
The monopoly’s profit: A social cost? 341 Summary 389
Price discrimination 342 Key concepts 389
A parable about pricing 342 Questions for review 389
The moral of the story 343
Multiple choice 389
The analytics of price discrimination 344
Problems and applications 390
Examples of price discrimination 345
In the news: Why do Australians pay more for digital Appendix: Types of oligopolistic competition 394
downloads? 347 Anticipating your competitor’s response 394
Conclusion: The prevalence of monopoly 349 Cournot quantity competition 394
Summary 350 Bertrand price competition 398
Comparing Cournot and Bertrand competition 399
Key concepts 350
Questions for review 350 Chapter 18 Competition policy 400
Multiple choice 350 Public policy towards monopolies 401
Problems and applications 351 Using the law to increase competition 401

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 What Australian economists think 402 Problems and applications 441
Case study: The ACCC – Australia’s competition Appendix: The demand for labour under imperfect
regulator 402 competition and monopoly 444
What Australian economists think 404
Regulation 404 Chapter 20 Earnings and discrimination 446
Public ownership and privatisation 405 Some determinants of equilibrium wages 447
Doing nothing 406 Compensating differentials 447
Public policy towards oligopolies 408 Human capital 448
Restraint of trade and competition laws 408 Case study: The changing value of skills 449
In the news: How to form a cartel 408 Ability, effort and chance 449
What Australian economists think 410 Case study: The benefits of beauty 450
Controversies over competition policy 410 An alternative view of education: Signalling 451
In the news: When is the price of milk too low? 411 The superstar phenomenon 452
Case study: The Baxter case 413 Above-equilibrium wages: Minimum-wage laws, unions
Conclusion 415 and efficiency wages 453
Summary 416 The economics of discrimination 454
Key concepts 416 Measuring labour-market discrimination 454
Case study: Is Jennifer more employable than
Questions for review 416
Nuying? 455
Multiple choice 416
Discrimination by employers 456
Problems and applications 417 Case study: Segregated streetcars and the profit
motive 457
Part 6 The economics of labour markets 420 Discrimination by customers and governments 457
Chapter 19 The markets for the factors of Case study: Discrimination in sports 458
production 422 Conclusion 459
The demand for labour 423 Summary 460
The competitive, profit-maximising firm 424 Key concepts 460
The production function and the marginal product Questions for review 460
of labour 425 Multiple choice 461
The value of the marginal product and the demand
Problems and applications 461
for labour 426
What causes the labour demand curve to shift? 427 Appendix: Unions and imperfect competition in labour

CONTENTS
FYI: Input demand and output supply – two sides markets 463
of the coin 428 Unions as monopolists 463
The supply of labour 429 Bilateral monopoly 465
The trade-off between work and leisure 429 Are unions good or bad for the economy? 467
What causes the labour supply curve to shift? 430 Chapter 21 Income inequality and poverty 468
In the news: The economy needs you 431
The measurement of inequality 469
Equilibrium in the labour market 432
Australian income inequality 469
Shifts in labour supply 432
Case study: The women’s movement and income
Shifts in labour demand 434 distribution 471
Case study: Productivity and wages 435
Income inequality around the world 471
The other factors of production: Land and capital 436
The poverty rate 472
Equilibrium in the markets for land and capital 436
Problems in measuring inequality 474
FYI: What is capital income? 437
Case study: Alternative measures of inequality 475
Linkages among the factors of production 438
The political philosophy of redistributing income 476
Case study: The economics of the Black Death 438
Utilitarianism 476
Conclusion 439
Liberalism 478
Summary 440
Libertarianism 479
Key concepts 440 What Australian economists think 480
Questions for review 440 Policies to reduce poverty 480
Multiple choice 440 Minimum-wage laws 480

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 Social security 481 Signalling to convey private information 525
Negative income tax 481 Case study: Gifts as signals 526
In the news: Thinking innovatively about income Screening to induce information revelation 526
redistribution 482 Asymmetric information and public policy 527
In-kind transfers 483 Political economy 528
Antipoverty programs and work incentives 484 The Condorcet voting paradox 528
Conclusion 485 Arrow’s impossibility theorem 529
Summary 486 The median voter is king 530
Key concepts 486 Politicians are people too 532
Questions for review 486 Behavioural economics 532
People aren’t always rational 532
Multiple choice 486
In the news: Our inertia may be costing lives 534
Problems and applications 487 People care about fairness 535
Part 7 Topics for further study 490 People are inconsistent over time 536
What Australian economists think 537
Chapter 22 The theory of consumer choice 492 Conclusion 537
The budget constraint: What the consumer can Summary 538
afford 493
Key concepts 538
Preferences: What the consumer wants 495
Questions for review 538
Representing preferences with indifference curves 495
Multiple choice 538
Four properties of indifference curves 496
Two extreme examples of indifference curves 498 Problems and applications 539
Optimisation: What the consumer chooses 500
The consumer’s optimum choices 500 Part 8 The data of macroeconomics 542
FYI: Utility – an alternative way to describe preferences Chapter 24 Measuring a nation’s income 544
and optimisation 500
The economy’s income and expenditure 545
How changes in income affect a consumer’s choices 502
How changes in prices affect a consumer’s choices 503 The measurement of gross domestic product 547
Income and substitution effects 505 ‘GDP is the market value…’ 547
Deriving the demand curve 506 ‘…of all…’ 547
Three applications 508 ‘…final…’ 548
‘…goods and services…’ 548
CONTENTS

Do all demand curves slope downwards? 508

Case study: The search for Giffen goods 509 ‘…produced…’ 548
How do wages affect labour supply? 509 ‘…within a country…’ 548
Case study: Income effects on labour supply – historical ‘…in a given period of time’ 549
trends, lottery winners and the Carnegie The components of GDP 549
conjecture 512 FYI: Three measures of income 551
What Australian economists think 513 FYI: A different way to arrive at GDP 552
How do interest rates affect household saving? 513 Real versus nominal GDP 553
Conclusion: Do people really think this way? 516 A numerical example 553
Summary 517 The GDP deflator 555
Key concepts 517 Case study: Real GDP over recent history 555
Questions for review 517 GDP and economic wellbeing 557
Case study: Alternative measures of an economy’s
Multiple choice 518
wellbeing 558
Problems and applications 518 FYI: Excerpt from the Human Development Report
2016 559
Chapter 23 Frontiers of microeconomics 521 Case study: International differences in GDP and the
Asymmetric information 522 quality of life 560
Hidden actions: Principals, agents and moral hazard 522 Conclusion 561
FYI: Corporate management 523 Summary 562
Hidden characteristics: Adverse selection and the lemons
Key concepts 562
problem 524

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Questions for review 562 Research and development 617
Multiple choice 563 In the news: Using experiments to evaluate aid and
ignite prosperity 619
Problems and applications 563
Conclusion: The importance of long-run growth 621
Chapter 25 Measuring the cost of living 566 Summary 622
The consumer price index 567 Key concepts 622
FYI: The change to decimal currency 567 Questions for review 622
How the consumer price index is calculated 568
Multiple choice 623
FYI: What is in the CPI’s basket? 570
Problems in measuring the cost of living 571 Problems and applications 623
In the news: What happens when prices go down? 571
The GDP deflator versus the consumer price index 574 Chapter 27 Saving, investment and the financial
Correcting economic variables for the effects of
system 625
inflation 576 Financial institutions in the Australian economy 626
Dollar figures from different times 576 Financial markets 627
Indexation 577 Case study: Key numbers for stock watchers 630
Real and nominal interest rates 577 Financial intermediaries 631
In the news: Mr Index goes to Hollywood 578 Summing up 633
Conclusion 580 In the news: Financial institutions in trouble: To bail or
let them sink? 633
Summary 582
Saving and investment in the national income
Key concepts 582 accounts 635
Questions for review 582 Some important identities 635
Multiple choice 583 The meaning of saving and investment 637
Problems and applications 583 The market for loanable funds 637
FYI: Present value 638
Part 9 The real economy in the long run 586 Supply of and demand for loanable funds 639
Policy 1: Taxes and saving 641
Chapter 26 Production and growth 588 Policy 2: Taxes and investment 643
Economic growth around the world 590 Policy 3: Government budgets – surplus or deficit? 644
FYI: The magic of compounding and the rule of 70 592 What Australian economists think 646
Productivity: Its role and determinants 593 Case study: Government debt and the sustainability of

CONTENTS
public finances 647
Why is productivity so important? 593
How is labour productivity determined? 594 Conclusion 650
Case study: Are natural resources or global warming In the news: Is ‘financialization’ of the economy
limits to growth? 596 desirable? 650
The production function 601 Summary 652
Economic growth and public policy 602 Key concepts 652
The importance of saving and investment 602 Questions for review 652
Diminishing returns to physical capital and the catch-up Multiple choice 653
effect 603
Problems and applications 653
Investment from abroad 605
Education 606
Chapter 28 The natural rate of
Health and nutrition 607
unemployment 656
Property rights, markets, trust and political stability 608
Free trade 610 Identifying unemployment 658
What Australian economists think 611 How is unemployment measured? 658
In the news: The United Nation’s development Case study: Labour-force participation of men and
goals 611 women in the Australian economy 662
Discouraging excessive population growth 613 Is unemployment measured correctly? 664
Case study: The link between population growth and In the news: Is true Australian unemployment double the
technological progress 615 official rate? 665
In the news: Does migration help or hinder economic How long are the unemployed without work? 665
growth? 616 Why is there unemployment? 666

xiii
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 Classical unemployment 666 Conclusion 710
Minimum-wage laws 667 Summary 711
What Australian economists think 668 Key concepts 711
Unions and collective bargaining 669
FYI: Why do strikes occur? 670 Questions for review 711
The theory of efficiency wages 671 Multiple choice 712
Case study: Henry Ford and the generous $5-a-day Problems and applications 712
wage 672
FYI: The economics of asymmetric information: Adverse Chapter 30 Inflation: Its causes and costs 715
selection and moral hazard 674 The causes of inflation 717
Frictional unemployment 675 The level of prices and the value of money 717
The inevitability of frictional unemployment 675 Money supply, money demand and monetary
Public policy and job search 676 equilibrium 717
Unemployment benefits 676 The effects of a monetary injection 719
Structural unemployment 677 Case study: Printing money 720
In the news: The Terminator’s move from the big screen A brief look at the adjustment process 721
to the labour market near you 677 The classical dichotomy and monetary neutrality 721
Case study: The differences in unemployment within Velocity and the quantity equation 723
Australia and across countries 680 Case study: Money and prices during four
Conclusion 681 hyperinflations 724
Summary 682 The inflation tax 725
The Fisher effect 725
Key concepts 682
In the news: Fighting the war … on inflation? 726
Questions for review 682 The costs of inflation 730
Multiple choice 683 A fall in purchasing power? The inflation fallacy 730
Problems and applications 683 Shoeleather costs 731
Menu costs 732
Part 10 Money and prices in the long run 686 Relative-price variability and the misallocation of
Chapter 29 The monetary system 688 resources 732
Inflation-induced tax distortions 732
The meaning of money 689
Confusion and inconvenience 734
The functions of money 690
A special cost of unexpected inflation: Arbitrary
Kinds of money 690
CONTENTS

redistributions of wealth 734

Money in the Australian economy 692 Case study: The Wonderful Wizard of Oz and the free-
In the news: Banning Bitcoin is stupid 692 silver debate 735
Case study: Whose currency is the fairest in the In the news: If inflation is bad, then deflation must be
land? 694 good … right? 737
The Reserve Bank of Australia 695 Conclusion 738
FYI: Credit cards, debit cards, smart cards and
Summary 739
money 696
Organisation of the RBA 696 Key concepts 739
Changes in the RBA’s role 697 Questions for review 739
In the news: The importance of the RBA 698 Multiple choice 739
Banks and the money supply 700 Problems and applications 740
The simple case of 100 per cent reserve
banking 700 Part 11 The macroeconomics of open
Money creation with fractional-reserve economies 742
banking 701
Chapter 31 Open-economy macroeconomics:
The money multiplier 702
Basic concepts 744
Bank capital, leverage and the Global Financial Crisis
of 2008 703 The international flows of goods and capital 745
Monetary policy in Australia today 705 The flow of goods: Exports, imports and net exports 745
Problems in controlling the money supply 708 Case study: The importance of trade in the Australian
Case study: Bank runs and the money supply 709 economy 746

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 In the news: Australia’s trade balance swings from Summary 789
positive to negative 748 Key concepts 789
The flow of financial resources: Net foreign investment 750
Questions for review 789
In the news: As globalisation of the food supply chain
increases … so too does the trade in disease 750 Multiple choice 789
The equality of the current account and the capital and Problems and applications 790
financial accounts 752
Saving, investment and their relationship to the Part 12 Short-run economic fluctuations 794
international flows 753
Case study: Saving, investment and net foreign Chapter 33 Aggregate demand and aggregate
investment of Australia 754 supply 796
The prices for international transactions: Real and Three key facts about economic fluctuations 797
nominal exchange rates 756 Fact 1: Economic fluctuations are irregular and
Nominal exchange rates 756 unpredictable 797
Real exchange rates 757 Fact 2: Most macroeconomic quantities fluctuate
A first theory of exchange-rate determination: together 799
Purchasing-power parity 758 Fact 3: As output falls, unemployment rises 800
The basic logic of purchasing-power parity 759 FYI: Okun’s law 800
Implications of purchasing-power parity 759 Case study: No recession in Australia during or
In the news: Purchasing-power parity and the Big post the GFC? 801
Mac 760 Explaining short-run economic fluctuations 802
In the news: Purchasing-power parity and the iPod 761 How the short run differs from the
Case study: The nominal exchange rate during long run 802
hyperinflation 763 The basic model of economic
Limitations of purchasing-power parity 764 fluctuations 803
Conclusion 765 The aggregate-demand curve 804
Summary 766 Why the aggregate-demand curve is
Key concepts 766 downward-sloping 804
Why the aggregate-demand curve might shift 806
Questions for review 766
The aggregate-supply curve 807
Multiple choice 766
Why the aggregate-supply curve is vertical in the
Problems and applications 767 long run 807

CONTENTS
Chapter 32 A macroeconomic theory of the open Why the long-run aggregate-supply curve might
shift 808
economy 769
Why the aggregate-supply curve is upward-sloping in the
Supply of and demand for loanable funds and short run 809
foreign-currency exchange 770
Why the short-run aggregate-supply curve might
The market for loanable funds 771 shift 811
The market for foreign-currency exchange 772 In the news: Can productivity keep
Equilibrium in the open economy 775 increasing? 812
Net foreign investment: The link between the two Two causes of recession 812
markets 775 The effects of a shift in aggregate demand 813
FYI: Purchasing-power parity as a special case 775 In the news: How Australia rolls with the economic
Simultaneous equilibrium in two markets 776 punches 815
FYI: The classical dichotomy once again 778 The effects of a shift in aggregate supply 817
How policies and events affect an open economy 778 Conclusion: The origins of aggregate demand and
Government budget deficits 779 aggregate supply 819
In the news: Aussie dollar won’t give up 780 Summary 820
Trade policy 782
Key concepts 820
Political instability and capital flight 784
Questions for review 820
Conclusion 787
In the news: The rise of Asia … but the US dollar is still Multiple choice 821
the reserve currency … for now 787 Problems and applications 821

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 Chapter 34 The influence of monetary and fiscal Rational expectations and the possibility of costless
policy on aggregate demand 824 disinflation 870
How monetary policy influences aggregate demand 825 The Accord approach 871
Case study: Why 2–3 per cent? 826 A low-inflation era 873
The downward slope of the aggregate-demand Conclusion 874
curve 828 Summary 875
The theory of liquidity preference 829 Key concepts 875
How fiscal policy influences aggregate demand 832
Questions for review 875
Changes in government purchases 832
Multiple choice 875
The multiplier effect 833
The crowding-out effect 833 Problems and applications 876
FYI: A formula for the government-purchases
multiplier 835 Chapter 36 Global Financial Crisis of 2008 and
Changes in taxes 836 beyond 878
FYI: How fiscal policy might affect aggregate Overview of the main elements of financial crises 880
supply 837
The causes of the GFC 881
Using policy to stabilise the economy 837
Rising household debt 882
The case for active stabilisation policy 837
Opaque mortgage securitisation 882
Case study: Keynesian thinking today 839
In the news: Recipe for disaster: The formula that killed
In the news: To balance or not to balance – that is the
Wall Street 885
question! 840
Ill-designed government policies 885
The case against active stabilisation policy 845
In the news: What do central banks do when monetary Loose monetary policy 888
policy doesn’t work? 846 Global economic trends and imbalances 889
Automatic stabilisers 847 The propagation of the GFC 890
The economy in the long run and the short run 848 House prices decline 890
FYI: The long run and the short run: An algebraic Problems of securitised mortgages 891
explanation 849 Panic in the financial markets 891
Conclusion 850 Bankruptcies and bailouts 892
Summary 851 Drop in aggregate demand and production 892
Case study: How does the GFC compare to the 1930s
Key concepts 851 Great Depression? 892
CONTENTS

Questions for review 851 Policy responses to the GFC 894

Multiple choice 852 What kind of shocks caused the GFC? 895
Problems and applications 852 The self-correction of the GFC shocks: The theory 896
Macroeconomic policy response to the GFC shocks: The
Chapter 35 The short-run trade-off between theory 897
What Australian economists think 898
inflation and unemployment 855
Macroeconomic policy responses to the GFC shocks:
The Phillips curve 856 The reality 898
Origins of the Phillips curve 856 Case study: How did Australia do during the
Aggregate demand, aggregate supply and the Phillips GFC? 901
curve 857 Lessons from the GFC 904
Shifts in the Phillips curve: The role of expectations 859 In the news: Is the common currency Euro responsible
The long-run Phillips curve 859 for Eurozone’s troubles? 906
Expectations and the short-run Phillips curve 862 Conclusion 907
In the news: Has inflation targeting been too Summary 909
successful? 864
Key concepts 909
Shifts in the Phillips curve: The role of supply
shocks 866 Questions for review 909
The cost of reducing inflation 868 Multiple choice 909
The sacrifice ratio 869 Problems and applications 910

xvi
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 That the government should balance its budget 921
Part 13 Final thoughts 912
Pro: The government should balance its budget 921
Chapter 37 Five debates over macroeconomic Con: The government should not balance its budget 922
policy 914 That the tax laws should be reformed to encourage
That monetary and fiscal policymakers should try to saving 923
stabilise the economy 915 Pro: The tax laws should be reformed to encourage
Pro: Policymakers should try to stabilise the saving 923
economy 915 Con: The tax laws should not be reformed to encourage
Con: Policymakers should not try to stabilise the saving 924
economy 916 Conclusion 926
That monetary policy should be made by rule rather than Summary 927
by discretion 917
Questions for review 927
Pro: Monetary policy should be made by rule 917
Problems and applications 928
Con: Monetary policy should not be made by rule 917
That the central bank should aim for zero inflation 918 Glossary 930
Pro: The central bank should aim for zero inflation 918 Suggestions for reading 937
Con: The central bank should not aim for zero Index 940
inflation 919

CONTENTS

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xviii

Introduction

Chapter 1 Ten principles of economics

Chapter 2 Thinking like an economist
Chapter 3 Interdependence and the gains from trade

The market forces

of supply and
demand
Learning objectives
In this chapter you will:
learn what a competitive market is
examine what determines the demand for a good in a competitive market
examine what determines the supply of a good in a competitive market
see how supply and demand together set the price of a good and the quantity sold
consider the key role of prices in allocating scarce resources in market economies.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 xix

8 Suppose that the government decides to issue tradeable permits for a certain form of pollution.
a Does it matter for economic efficiency whether the government distributes or auctions the
permits? Why or why not?
b If the government chooses to distribute the permits, does the allocation of permits among
firms matter for efficiency? Explain?
9 There are three industrial firms in Happy Valley.
The government wants to reduce pollution to 60 units, so it gives each firm 20 tradeable pollution
permits.

Cost of reducing
Firm Initial pollution level
pollution by one unit
A 30 units $20
B 40 30
C 20 10

a Who sells permits and how many do they sell? Who buys permits and how many do they
buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total
cost of pollution reduction in this situation?
b How much higher would the costs of pollution reduction be if the permits could not be
traded?

Search Me!
Summary
When accessing information about economics, use the following keywords in any combinations
you require: • When a transaction between a buyer and a seller directly affects a third party, that effect is called
conference presentation an externality. If an activity yields a negative externality, such as pollution, the socially optimal
quantity in a market is less than the equilibrium quantity. If an activity yields a positive
Coase theorem
externality, such as technology spillovers, the socially optimal quantity is greater than the
corrective tax
equilibrium quantity.
• Governments pursue various policies to remedy the inefficiencies caused by externalities.
CourseMate Express Express Sometimes the government prevents socially inefficient activity by regulating behaviour. At other
times, it internalises an externality using corrective taxes. Another public policy is to issue
For more multimedia resources and activities on economics, visit the Economics CourseMate permits. For example, the government could protect the environment by issuing a limited number
website. of pollution permits. The end result of this policy is similar to imposing corrective taxes on
polluters.
• Those affected by externalities can sometimes solve the problem privately. For instance, when one
business confers an externality on another business, the two businesses can internalise the
2 If the production of a good yields a negative externality, then the social-cost curve lies ________ externality by merging. Alternatively, the interested parties can solve the problem by signing a
the supply curve, and the socially optimal quantity is ________ than the equilibrium quantity. contract. According to the Coase theorem, if people can bargain without cost, then they can
a above, greater always reach an agreement in which resources are allocated efficiently. In many cases, however,
b above, less reaching a bargain among the many interested parties is difficult, so the Coase theorem does not
c below, greater apply.
d below, less
3 When the government levies a tax on a good equal to the external cost associated with the good’s
production, it ________ the price paid by consumers and makes the market outcome ________
efficient. Key concepts
a increases, more coase theorem, p. 232 internalising an transaction costs, p. 233
b increases, less corrective taxes, p. 226 externality, p. 222
c decreases, more
d decreases, less
4 Which of the following statements about corrective taxes is NOT true?
a Economists tend to prefer them to command-and-control regulation.
Questions for review
b They raise government revenue. 1 Give an example of a negative externality and of a positive externality.
c They cause deadweight losses. 2 Draw a supply-and-demand diagram to explain the effect of a negative externality that occurs as
238
d They reduce the quantity sold in a market. a result of a firm’s production process.
Part 4 The economics of the public sector 5 The government auctions off 500 units of pollution rights. They sell for $50 per unit, raising total 3 In what way does the patent system help society solve an externality problem?
revenue of $25 000. This policy is equivalent to a corrective tax of ________ per unit of pollution. 4 What are corrective taxes? Why do economists prefer them to regulations as a way to protect the
a $10 environment from pollution?
b $50 5 List some of the ways that the problems caused by externalities can be solved without
c $450 government intervention.
d $500 6 Imagine that you are a non-smoker sharing a room with a smoker. According to the Coase
6 The Coase theorem does NOT apply if theorem, what determines whether your room-mate smokes in the room? Is this outcome
a there is a significant externality between two parties. efficient? How do you and your room-mate reach this solution?
b the court system vigorously enforces all contracts.
c transaction costs make negotiating difficult.
d both parties understand the externality fully. Multiple choice
1 Which of the following is an example of a positive externality?
a Bob mows Hillary’s lawn and is paid $100 for performing the service.
Problems and applications b While mowing the lawn, Bob’s lawnmower spews out smoke that Hillary’s neighbour Kristen
has to breathe.
1 Consider two ways to protect your car from theft. A steering wheel lock makes it difficult for a car
c Hillary’s newly cut lawn makes her neighbourhood more attractive.
thief to take your car. A GPS tracking system makes it easier for the police to catch the car thief who
d Hillary’s neighbours pay her if she promises to get her lawn cut on a regular basis.
has stolen it. Which of these methods conveys a negative externality on other car owners? Which
conveys a positive externality? Do you think there are any policy implications of your analysis?
2 Consider the market for fire extinguishers. 235
a Why might fire extinguishers exhibit positive externalities in consumption?
Chapter 10 Externalities
b Draw a graph of the market for fire extinguishers, labelling the demand curve, the social-
value curve, the supply curve and the social-cost curve.
c Indicate the market equilibrium level of output and the efficient level of output. Give an
explanation for why these quantities differ.
d If the external benefit is $10 per extinguisher, describe a government policy that would result
in the efficient outcome.
3 Greater consumption of alcohol leads to more motor vehicle accidents and, thus, imposes costs
on people who do not drink and drive.
a Illustrate the market for alcohol, labelling the demand curve, the social-value curve, the
supply curve, the social-cost curve, the market equilibrium level of output and the efficient
level of output.
b On your graph, shade the area corresponding to the deadweight loss of the market
equilibrium. (Hint: The deadweight loss occurs because some units of alcohol are consumed
for which the social cost exceeds the social value.) Explain.

236

Part 4 The economics of the public sector

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xx

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 xxi

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 PREFACE TO
THIS EDITION
Studying economics should invigorate and enthral. It should challenge students’ preconceptions and
provide them with a powerful, coherent framework for analysing the world they live in. Yet, all too often,
economics textbooks are dry and confusing. Rather than highlighting the important foundations of
economic analysis, these books focus on the ‘ifs’ and ‘buts’. The motto underlying this book is that it is
‘the rule, not the exception’ that is important. Our aim is to show the power of economic tools and the
importance of economic ideas.
This book has been designed particularly for students in Australia and New Zealand. However, we
are keenly aware of the diverse mix of students studying in these countries. When choosing examples
and applications, we have kept an international focus. Whether the issue is sauce tariffs in the EU, rent
control in Mumbai, road tolls in Singapore or the gas industry in Australia, examples have been chosen
for their relevance and to highlight that the same economic questions are being asked in many
countries. The specific context in which economics is applied may vary, but the lessons and insights
offered by the economic way of thinking are universal.
To boil economics down to its essentials, we had to consider what is truly important for students to
learn in their first course in economics. As a result, this book differs from others not only in its length
but also in its orientation.
It is tempting for professional economists writing a textbook to take the economist’s point of view
and to emphasise those topics that fascinate them and other economists. We have done our best to
avoid that temptation. We have tried to put ourselves in the position of students seeing economics for
the first time. Our goal is to emphasise the material that students should and do find interesting about
the study of the economy.
One result is that more of this book is devoted to applications and policy, and less is devoted to
formal economic theory, than is the case with many other books written for the principles course. For
example, after students learn about the market forces of supply and demand in Chapters 4 to 6, they
immediately apply these tools in Chapters 7 to 9 to consider three important questions facing our
society: Why is the free market a good way to organise economic activity? How does taxation interfere
with the market mechanism? Who are the winners and losers from international trade? These kinds of
questions resonate with the concerns and interests that students hear about in the news and bring from
their own lives.
Throughout this book, we have tried to return to applications and policy questions as often as
possible. Most chapters include case studies illustrating how the principles of economics are applied. In
addition, ‘In the news’ boxes offer excerpts from newspaper and magazine articles showing how
economic ideas shed light on the current issues facing society. It is our hope that after students finish
their first course in economics, they will think about news stories from a new perspective and with
greater insight.

xxii
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 To write a brief and student-friendly book, we had to consider new ways to organise the material.
This book includes all the topics that are central to a first course in economics, but the topics are not
always arranged in the traditional order. What follows is a whirlwind tour of this text. This tour will, we
hope, give instructors some sense of how the pieces fit together.
Chapter 1, ‘Ten principles of economics’, introduces students to the economist’s view of the world. It
previews some of the big ideas that recur throughout economics, such as opportunity cost, marginal
decision making, the role of incentives, the gains from trade and the efficiency of market allocations.
Throughout the book, we refer regularly to the Ten Principles of Economics in Chapter 1 to remind
students that these principles are the foundation for most economic analysis. A key icon in the margin
calls attention to these references.
Chapter 2, ‘Thinking like an economist’, examines how economists approach their field of study. It
discusses the role of assumptions in developing a theory and introduces the concept of an economic
model. It also discusses the role of economists in making policy. The appendix to this chapter offers a
brief refresher course on how graphs are used and how they can be abused.
Chapter 3, ‘Interdependence and the gains from trade’, presents the theory of comparative
advantage. This theory explains why individuals trade with their neighbours, and why nations trade
with other nations. Much of economics is about the coordination of economic activity through market
forces. As a starting point for this analysis, students see in this chapter why economic interdependence
can benefit everyone. This is done using a familiar example of trade in household chores among
flatmates.
The next three chapters introduce the basic tools of supply and demand. Chapter 4, ‘The market

PREFACE TO THIS EDITION

forces of supply and demand’, develops the supply curve, the demand curve and the notion of market
equilibrium. Chapter 5, ‘Elasticity and its application’, introduces the concept of elasticity and uses it in
three applications to quite different markets. Chapter 6, ‘Supply, demand and government policies’,
uses these tools to examine price controls, such as rent control, the award wage system, tax incidence
and subsidies.
Attention then turns to welfare analysis using the tools of supply and demand. Chapter 7,
‘Consumers, producers and the efficiency of markets’, extends the analysis of supply and demand using
the concepts of consumer surplus and producer surplus. It begins by developing the link between
consumers’ willingness to pay and the demand curve and the link between producers’ costs of
production and the supply curve. It then shows that the market equilibrium maximises the sum of the
producer and consumer surplus. In this book, students learn about the efficiency of market allocations
early in their studies.
The next two chapters apply the concepts of producer and consumer surplus to questions of policy.
Chapter 8, ‘Application: The costs of taxation’, examines the deadweight loss of taxation. Chapter 9,
‘Application: International trade’, examines the winners and losers from international trade and the
debate about protectionist trade policies.
Having examined why market allocations are often desirable, the book then considers how the
government can sometimes improve on market allocations. Chapter 10, ‘Externalities’, examines why
external effects such as pollution can render market outcomes inefficient. It also examines the possible
public and private solutions to those inefficiencies. This has become highly relevant as policymakers
attempt to deal with mitigating the causes of climate change. Chapter 11, ‘Public goods and common
resources’, considers the inefficiencies that arise for goods that have no market price, such as national
defence. Chapter 12, ‘The design of the tax system’, examines how the government raises the revenue

xxiii
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 necessary to pay for public goods. It presents some institutional background about the tax system and
then discusses how the goals of efficiency and equity come into play in the design of a tax system.
The next six chapters examine firm behaviour and industrial organisation. Chapter 13, ‘The costs of
production’, discusses what to include in a firm’s costs and introduces cost curves. Chapter 14, ‘Firms
in competitive markets’, analyses the behaviour of price-taking firms and derives the market supply
curve. Chapter 15, ‘Monopoly’, discusses the behaviour of a firm that is the sole seller in its market. It
discusses the inefficiency of monopoly pricing and the value of price discrimination. Chapter 16,
‘Monopolistic competition’, examines behaviour in a market in which many sellers offer similar but
differentiated products. It also discusses the debate about the effects of advertising. Chapter 17,
‘Oligopoly and business strategy’, examines markets when there are only a few sellers and so strategic
interactions are important. It uses the prisoners’ dilemma as the model for examining strategic
interaction. Chapter 18, ‘Competition policy’, describes the policy instruments used by governments to
control monopoly power and preserve competition in markets.
Microeconomic reform is discussed throughout the chapters on firm behaviour and industrial
organisation rather than as a separate topic. For instance, the role of privatisation is included in Chapter
15, and competition and trade practices issues are discussed in Chapter 18. Also, note that Chapter 17
includes an appendix that can be used to teach students about the differences between price and
quantity competition in oligopoly. This appendix makes the latest game-theoretic thinking on these
issues accessible to introductory economics students.
The next three chapters examine issues related to labour markets. Chapter 19, ‘The markets for the
PREFACE TO THIS EDITION

factors of production’, emphasises the link between factor prices and marginal productivity. It includes
an appendix on the firm demand for labour under imperfect competition and monopoly. Chapter 20,
‘Earnings and discrimination’, discusses the determinants of equilibrium wages, including
compensating differentials, human capital, unions, efficiency wages and discrimination. The union
discussion goes beyond simplistic analyses of unions and monopolists, introducing union behaviour as
part of a bargaining equilibrium in bilateral monopoly. The discussion of human capital and efficiency
wages proves a convenient point to introduce students to the concepts of signalling and asymmetric
information. Chapter 21, ‘Income inequality and poverty,’ examines the degree of inequality in
Australian society, the alternative views about the government’s role in changing the distribution of
income, and the various policies aimed at helping society’s poorest members.
Chapter 22, ‘The theory of consumer choice’, analyses individual decision making using budget
constraints and indifference curves. Finally, Chapter 23, ‘Frontiers of microeconomics’, goes beyond
standard microeconomics to examine cutting-edge issues such as the role of information, political
economy and behavioural economics; all of which help explain more of what happens in the real world.
These last two chapters cover material that is somewhat more advanced than the rest of the book.
Some instructors may want to skip the last chapter, depending on the emphases of their courses and
the interests of their students. Instructors who do cover this material may want to move it earlier, and
we have written this chapter so that it can be covered any time after the basics of supply and demand
have been introduced.
Beginning in chapter 24, the book turns to the topics of macroeconomics. The coverage starts with
the issues of measurement. Chapter 24, ‘Measuring a nation’s income’, discusses the meaning of gross
domestic product and related statistics from the national income accounts. Chapter 25, ‘Measuring the
cost of living’, discusses the measurement and use of the consumer price index.
The next three chapters describe the behaviour of the real economy in the long run over which
wages and prices are flexible. Chapter 26, ‘Production and growth’, examines the determinants of the

xxiv
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Another Random Scribd Document
with Unrelated Content
 5,000 students; and although they do not, as yet,
graduate annually through all the higher departments of
learning as many scholars as were graduated from the 10
colleges that were in operation prior to the Revolutionary
War, because the training is not for scholarship, but for
special work, it seems probable that the educational
power is greater and exerts a wider influence.
“But whether this is so or not, the result of these brief
years of Christian work must be regarded as a
phenomenon in the history of the world. It is often said of
the movements of our time that they are only history
repeating itself; but if there is anything in history like this
generous outpouring of effort and means to redeem a
great mass of human merchandise, and lift it up out of its
squalor and wretchedness to the level of our common
Christian manhood, we exhort the friends of history to
produce it.”
We gladly avail ourselves of this opportunity, to recognize the
generous appreciation of our work which we have always received
from our Methodist friends—indeed, some of them are “ourselves”—
not the least valuable indication of which is the cordial and kindly
tone of the article from which we have quoted above from their
leading Review.

WHAT CAN THE WOMEN DO?

We are gratified with the evidence which is coming to us from
various quarters, of an increasing interest in our Southern work on
the part of our Christian women. A letter from Rhode Island inquires
the cost of supporting a female missionary to work among the
colored women of the South in their homes, after the plan
mentioned in the January Missionary. Another letter from Vermont
asks, more generally, What can the women do? How can they best
help the work by money and by goods? A word comes even from a
missionary in Constantinople, endorsing Caucasian women’s work for
Negro women in America.
In reply to such questions, we are happy to give all the light we can.
A lady missionary, to devote herself to the work named above, can
be sustained for from $350 to $450 a year, according to location; or,
a lady teacher in one of our established schools, for $250. A
student’s scholarship is from $70 to $80. We are, of course, glad to
accept money for such special purposes, and to use it as we are
instructed by the donors. One of the most pressing needs just now,
in which we are sure of sympathy from the house-keeperly instincts
of our good sisters, is that of bedding and table-linen for our
Educational institutions. We hear from the matron of Tougaloo
University, that the press of students is so great that she has used
her last quilt, and may have to take up carpets to cover the students
by night. Others are nearly as badly off. Perhaps the women of the
North can do no better thing than to supply this want for the
remainder of this winter, and more fully for another year.
We have no fear that we shall for a long time lack specialties of
wants and pressing needs, which will appeal to all who have an ear
to hear, and a heart to sympathize. Meanwhile, the great work goes
on in all its length and breadth, in which the Christian women of the
land may well join forces with the Christian men, as they have
always done, and do their part to save and elevate a needy race.

ITEMS FROM THE SCHOOLS.

Talladega, Ala.—“There are five Sunday-school prayer-meetings every
Sabbath afternoon, in which much feeling is manifested. In these
meetings four have expressed the hope of a new life. Others are
much interested.”
Tougaloo, Miss.—“There is considerable religious interest. Several are
inquiring, and a few profess conversion. We are running over with
students. We have put up a bed in the north recitation-room of the
primary building, and shall probably have to arrange another bed in
the same room before this week closes. We know of others that are
coming next week, and so on, and what are we going to do with
them? We have concluded to purchase lumber at once and put up
barracks for twenty students, for the prospect is that we shall have
that many more young men. We can accommodate six or eight
young women in the Peoria room. The erection of barracks will
involve an outlay of some three hundred dollars; but the lumber will
all come in play when we build the new chapel, which we shall be
obliged to have before the sessions of the next year begin. If the
school continues to prosper we shall probably commence another
year with a hundred boarders.”
Nashville, Tenn.—“We have a good school this year; about 270 in all.
We hold a half-hour extra meeting in the boarding department.
Some inquirers. About twenty conversions last term.”
Atlanta, Ga.—“School is full. We have more pupils than for several
years before. There is some religious interest, though not so much
as we wish. Our purpose and hope is to make you a big contribution
toward the debt, by not asking you for any aid this year.”

NEWS FROM THE CHURCHES.

Marion, Ala.—“We had an interesting day, yesterday, in our church. It
was Communion. Four girls from twelve to sixteen years old, and
one young man of twenty years, were received on profession. A
Female Prayer-meeting has been commenced at the ‘Home,’ and
promises well. The Teacher’s Meeting is also held in our parlor every
Friday night. Our evening meetings are well attended. We enjoy
singing the ‘Gospel Hymns.’ The people almost all sing, and are not
afraid to hear their own voices. Last evening seven or eight of the
brethren took part, and one woman felt constrained to say a few
words. Perfect harmony and good-feeling seem to prevail in the
church, and the prospects for the coming year are quite
encouraging.”
Macon, Ga.—“Our church is greatly blessed in connection with the
Week of Prayer. Daily meetings have been held for three weeks, and
the interest continues good. Several conversions have cheered our
hearts.”

We have been favored with a copy of the “Minutes of the South-

western Georgia Teachers’ Association (colored), held at Howard
Normal School, December 1, 1877.”
The graduates and students of Atlanta University seem to be the
leading spirits in this Association. The exercises were very much like
those of similar associations or conventions, though without the set
speeches of old wheel-horses, which are of doubtful advantage.
That parliamentary gymnastics were not entirely ignored is evident
from the following quotation: “It was moved that the roll be called,
for the purpose of members paying their dues. Thereupon quite a
discussion arose, when the previous question was called for; the
previous question was seconded, but the main question was lost.”
The report says of the address of the President: “He very graphically
described the field in which we are to do the work that is to be
done, and how it is to be done. He said that he felt sure that ‘the
Great Disburser of Human Events’ held something good in store for
the Negro. Teachers, you are the salt of the race; lose not your
savor, but keep pushing on in this grand cause of education, and the
heights may yet be reached in our day.”
The Committee on the Educational Condition of South-western
Georgia gives the reins to its tropical imagination for a moment,
when it says: “We are exceedingly sorry to find our people in some
places sleeping on Poverty’s bedstead, covered with the blanket of
Ignorance.”
Their statement that, in the eight counties reported, the public-
school fund pays only from thirty-three and one-third to eighty cents
a month per pupil, and that for three months only, would seem to
indicate that the public-school system of Georgia is not very
expensive or uniform in its operation. But it is to be hoped that this
little plant, so cautiously set by the poverty-stricken farmer, may
have a steady growth into a large and symmetrical tree.
We are glad to note the enterprise of our colored friends in
sustaining and directing for themselves this Howard Normal School,
and in holding these educational meetings, and we recognize in it
one of the cheering results of our work.

NEGRO NOTES.

HOME.

—A colored gentleman of high standing and great influence—a life-

long resident of Philadelphia—was invited by Mrs. Hayes to “be
seated and talk on the political situation,” when the following
conversation took place: “It is very quiet now at the South, we
learn?” “Yes, madam; it is the quietness of death to the colored
people. My son is in jail for the crime of aiding in carrying the State
of South Carolina for the President.”
—Senator Blaine, in a speech at Hot Springs, Ark., put the Southern
question aptly thus: “Perfect peace in the South will everywhere
follow perfect justice. There is no man in the country who desires
strife for the sake of strife, but there will always be strife so long as
there is wrong.”
—There is a quaint, straightforward way of putting things sometimes
that strikes right at the root of things, an art which our colored
friends of the South seem especially to understand. And here is what
was sung recently at one of their meetings in Jacksonville:
 If you see Peter asleep at de gate,
Kase de night befo’ he was up so late,
You needn’t ’spect, with your load ob sin,
Dat you’ll slip past him and steal right in:
De angels always acts on de squar’;
Dey know you here, an’ dey’ll know you dar.

Such singing would not be in order in our churches. But, after all,
isn’t there a bit of truth right here, and may not these lines be
reflected on with considerable profit?
—A colored man, who very sensibly consulted President Hayes,
before migrating to San Domingo, received a letter in reply, from
which the following is extracted: “I have given some consideration to
your question as to the emigration of colored people from Florida to
San Domingo. I am not well informed as to the advantages offered
by San Domingo to immigrants, but my impression is that your
people should not be hasty in deciding to leave this country. The
mere difference in climate is a very serious objection to removal. The
first generation, in all such removals, suffer greatly. It is my opinion,
also, that the evils which now affect you are likely steadily, and I
hope rapidly, to diminish. My advice is, therefore, against the
proposed emigration.”

FOREIGN.

—Stanley’s African expedition cost $115,000, and he discovered

15,000,000 uncovered Africans. The Worcester Press says six
heathen for five cents is very reasonable.
—The missionaries of the Church Missionary Society to Lake Victoria
Nyanza have been cordially received by King Mtesa. When the
passage was read in the Society’s letter, in which a reference is
made to our Lord, the king ordered a salute to be fired, which was
explained to be for joy at the mention of the name of Jesus. The
king wished especially to know if the missionaries had brought the
book—the Bible. He has himself since acted as interpreter to his
people at the Sunday services.

CHINESE NOTES.
—It is not often that the report of a minority of one is invested with
so much importance or interest as that found, in an unfinished
condition, among the papers of the late Senator Morton. We give a
very brief synopsis of its main points:
A cardinal principle in our government is its openness to immigrants
from all parts of the world; it is not limited in its statement by color,
character or creed. While the Oriental nations have come on to our
ground, it is proposed that we should go back to that which they
have abandoned, and for the same reasons which they have given
up—interference with trade and labor, and corruption of morals and
religion.
The security of our nation depends not on material wealth nor
general intelligence, but in devotion to the doctrines upon which the
government was founded, “And the profound conviction in the minds
of the people that the rights of man are not conferred by
constitutions or written enactments, which may be altered or
abolished, but are God-given to every human being born into the
world, and cannot be violated by constitutions, enactments, or
governments, without trampling upon natural and inalienable rights.”
Growing out of these doctrines is the policy of free immigration,
which we are at liberty to regulate, but not proscribe, as we may lay
down the conditions of citizenship, but not consistently forbid it.
Having given political rights to the negro, it is inconsistent to renew
race prejudices, and exclude the Asiatics on the ground of color,
civilization and religion. These are the actual grounds of the
prejudice. But the question is not one of naturalization, but of
permission to come into our country to work, to trade, and to
acquire property, though the senator deemed it impossible that they
should be protected, save as they should be allowed to become
citizens, to vote and to be represented in the government. He refers
to the fact that the Chinese take ship from a British port, and that
our dealing in regard to their importation must be with the English
Government. He brings important testimony to demonstrate the
value of their labor in the construction of railroads and in the
harvesting of crops. In these especially, by their freedom from
combinations to control the price of labor, and as having brought
wages to a level, which, though still higher than in other States,
makes it possible for Californian manufacturers to compete with
those of other States and countries. But for Chinese labor, he says,
California would not have more than one-half or two-thirds of her
present white population; it is indispensable to farming operations;
their labor is as free as any other.
The majority report, in its concluding paragraphs, says that the
question that now arises on the Pacific Coast will probably have to
be met upon the banks of the Mississippi, and, perhaps, on the Ohio
and Hudson. It is a standing menace to republican institutions and
Christian civilization. Free institutions, founded upon free schools
and intelligence, can only be maintained when based on intelligent
and adequately paid labor. Adequate wages are needed to give self-
respect to the laborer, and the means of education to his children.
Family life is a great safeguard to our political institutions. Chinese
immigration involves sordid wages, no public schools, and the
absence of the family. They show few of the characteristics of a
desirable population, and many to be deprecated by any patriot. This
problem is too important to be treated with indifference. Congress
should solve it, having due regard to any rights already accrued
under existing treaties, and to humanity; but it must be solved, in
the judgment of the committee, unless our Pacific possessions are to
be ultimately given over to a race alien in all its tendencies, which
will make of it practically provinces of China, rather than States of
the Union. The committee recommend that measures be taken by
the Executive, looking toward a modification of the existing treaty
with China, confining it to strictly commercial purposes, and that
Congress legislate to restrain the great influx of Asiatics to this
country.
—The San Francisco “Workingmen” (?) have, under the lead of
professional agitators, become more than ever threatening and
incendiary in their language. It was given out that the Chinese
passengers of the steamer Tokio would be attacked on their arrival.
At this point the authorities interfered. The mayor appointed special
police, and the two ringleaders were arrested for conspiracy and
misdemeanor, and put under heavy bail. General McComb ordered
the entire military force of the city to assemble at the armories, and
General McDowell gave assurance that the United States troops
would come to their aid if required. Under these conditions the city
scum ceased coming to the surface, but settled quickly to the
bottom, where it belongs.
—Mr. Luttrell, a democratic member from California, has moved in
the House to amend the Steamboat Bill, so as to provide that no
American vessel shall employ, in any capacity whatever, a Chinese or
Mongolian.
—Treasury statistics show arrivals from China of 160,979 up to 1875.
In 1875 the arrivals were 19,033; but in 1876 the immigration fell off
to 16,879, owing to the April disturbance in that year in California.
For the first quarter of 1877 the number was only 965, but it soon
began to rise again, and on June 31 the total immigration was
figured at 284,547.
—The figures of the Custom House in San Francisco have been
collated to show that, out of a total of $6,692,000 paid for duties on
imports of foreign goods introduced during the past year, the
Chinese merchants paid $1,756,505, or over twenty-five per cent.
During the same time the Chinese paid for rent and water privileges
$223,000; for fire insurance, $96,000, and for marine insurance,
$86,000; they also paid $100,000 in taxes into the city treasury.
—In 1875, of 7,643 arrests for drunkenness, not one was a
Chinaman; of 3,263 paupers admitted to the almshouse, only six
were Chinamen; of 83 murderers hanged during the last year in the
United States only one was a Chinaman.
—Our antipathy is balanced to some extent by the appetite of Peru,
which has 60,000 Chinamen now within its borders, and so eagerly
desires more that an agent of the Peruvian Government is visiting
San Francisco with inducements to divert Chinese immigration to
that country.

NO ROOM IN THE INN.

REV. A. K. SPENCE, FISK UNIVERSITY.
The occasion of the accompanying lines was this: While President Hayes’ Peace
Policy was being applauded through the land, a young colored student, on his
way to Fisk University, was detained overnight at a station, as the trains did
not make connection. A hotel was near by, but he could not gain admission.
He asked the privilege of remaining in the depot, but that was not granted; so
he spent the whole night in the open air, pacing up and down to keep warm
and pass the time away.

Ought there not to be in every hotel some comfortable place where a colored
man can get food and shelter?

The weary stars went slowly westward to their rest,

And others from the east climbed up the zenith’s crest,
And chill winds smote him, shivering in the gloomy
night.
Turning his wistful gaze to catch the morning light,
There, wrapped in sleep, on couches soft and warm,
The slumberers dream sweet dreams, nor think of fear
or harm.
What has he done, with guilty hand and soul of sin,
That thus he stalks about, nor seeks the cheerful inn?

His brow is dark, and dark the night, and dark his soul
—
A tripple sea of gloom, whose waters o’er him roll!
And faith in man and God is low within his breast;
With many a bitter thought his heart is sore oppressed.
Like outlawed villain, stealing from the sight of men,
He crouches down, as if to sleep, nor slumbers then!
Athwart the darkness to his darker soul within,
The tantalizing light comes from the inn!

But yesterday, huzzas came from a million throats,

’Mid cannon’s boom and beat of drum and bugle’s
notes,
And banners waved, and flowers were scattered by the
fair,
And songs of peace and joy were in the quivering air;
And brothers, long estranged, clasped brothers once
again,
And swore eternal peace and equal rights to men—
For him, though wrapped in clean attire, but sable
skin,
No hospitable room is offered at the inn!

Oh, brothers of this mighty land, from South to North,

Grasp hands of greeting, pour your pæans forth!
And ne’er by brother’s hand may brother’s blood be
shed,
With burning towns and trampled fields and mangled
dead!
Forget the past, nor let it rankle in your breast;
Rejoice together of one glorious land possessed!
But, oh! forget not him who, not for any sin,
But for the thing God made him, is debarred the inn!

Oh, peaceful President of this great land, to thee

All thanks for thy good words for old fraternity!
Thy name shall be inscribed in gold on history’s page,
And read by countless multitudes from age to age,
If thou shalt teach a people, long in strife and feud,
To dwell in unity and seek each other’s good;
From prejudice of section, creed and race shalt win,
So all of every name and hue shall share the inn!

Oh, brother of the sable brow, my brother, mine,

The night is dark and long, and yet the sun shall shine;
Patience be thine, and God-like charity and love,
And eye of faith and hope that looks to One above.
For scorn give benediction, and for insult prayer;
And go to Bethlehem’s manger, and remember there
Another was like thee, who, sinless, bore our sin!
And there shall yet be room for Christ, and thee, within
the inn!
 THE FREEDMEN.

GEORGIA.

Atlanta University.

ITS ORGANIZATION.

REV. E. A. WARE, PRESIDENT.

The first term of Atlanta University began, under its charter granted
in 1867, in Oct., 1869. The highest class, at that time, was the junior
preparatory. By a natural and steady growth, there has come to be a
regular college department, from which two classes, (nine students),
have been graduated, and in which there are now twenty-four
students; a scientific department, with four; a preparatory, with 37;
a higher normal, from which have graduated five classes, (twenty-
four students), and which numbers at present 68; and a lower
normal, with 62 students. The higher normal begins with the usual
high-school studies, and continues four years. The lower normal
includes the grammar-school studies, and the first two years of the
higher normal course. Instruction in theology was given, until the
State aid was granted to the school; it has since been discontinued.
The home and family feature of the school is made prominent. A
lady has charge of the young men’s building, and, so far as possible,
takes the place of mother, making the house a home, instead of a
college barrack. The refining, elevating, and restraining influence of
this family life is incalculable.
Every effort is put forth to make the Sabbath a power. The usual
church service is held in the morning, Sunday-school in the
afternoon, and prayer-meeting at night. The monthly missionary
concert is observed. The contributions at this meeting, for the nine
school months, amount to about fifty dollars. The church prayer-
meeting is held on Wednesday evening; the school prayer-meeting
for all the students on Friday afternoon. At this meeting, the school
makes weekly offerings, by the envelope plan, toward the payment
of the debt of the American Missionary Association.
The workers this year, including Pastor, Treasurer, Steward,
Housekeeper and Matron, number twelve. Among them are
representatives of Yale, Harvard, Amherst and Oberlin.
The institution owns sixty acres of land, about one mile from the
centre of the city. That part of it occupied by the buildings,
commands an extended view in all directions. The buildings are two
plain, four-storied, brick dormitories, one for boys, the other for
girls. These also afford rooms for teachers, and the basement and
first floor of the boys’ building give space for chapel, schoolrooms,
library and reading-room. Many of these rooms are entirely unfit for
these uses, and are much needed for sleeping rooms. By an hour’s
work each day, the students care for the buildings, cultivate the
grounds, cut the wood, and do the house-work, except the cooking.
The Graves Library contains about four thousand volumes, and has
an endowment of five thousand dollars. The library and reading-
room are thoroughly used. Excepting for the library, the school has
no endowment, but depends for support on the American Missionary
Association, and the State of Georgia, which latter has appropriated
to it $8,000 annually.
The name “University,” when adopted in 1867, signified nothing,
save as a prophecy. As such it was adopted. It foretold the capacity
of those, for whom the school was especially founded, to advance in
education, till they should need the advantages of a full university
course. It foretold the willingness of the friends of humanity to
furnish these advantages. There is no longer any doubt of the
complete fulfillment of the first prophecy, provided the second can
be speedily accomplished.
 ITS WORK.

REV. C. W. FRANCIS.

To prepare teachers for the education of the children of more than

half a million of poor and illiterate people is, and must remain, the
chief work of the school. The ability to read and write is the smallest
of the needs of the people, old and young, among whom such
teachers are called to labor. They must teach the elements of morals
and religion, of social and domestic life, must supply the forces
which are to shape and guide the people from serfdom up to an
intelligent, Christian citizenship. The course pursued in this school
consists essentially in separating the pupils by means of a family
school from all old associations and habits, and subjecting them for
months and years to a strong and watchful discipline, in surrounding
them with the most earnest and aggressive religious influences, in
giving them the best mental training and furnishing which the time
and facilities will allow, thus to stamp upon them new
characteristics, and mould them so that they will represent and
teach the best Christian culture and civilization. That they may resist
the strong influences pulling them down on every hand, they need
to be thoroughly fixed and set in character before leaving school.
Such a complete transformation of character and life as is aimed at
here, requires time and the constant exercise of the highest skill and
patience. It is no ordinary education which is sought, but a special
and peculiar training for a high and holy missionary work.
The demand for teachers from this school is continually greater than
the supply. In the last catalogue were the names of 214 pupils, and
of these, more than 150 are known to have engaged in teaching
during the year. In the previous year, out of 240, more than 175
were at work in the same way. And this number includes nearly
every person in school whose age and attainments gave him even
the smallest fitness for the work. The school term lasts nine months,
and there is but one vacation, including the three summer months.
It is the practice of the pupils to pass directly from school to their
work in teaching, and many have done so for a number of years,
without going home or having a rest. They have in day-schools an
average attendance of thirty-five or forty; and as most have night-
schools, and nearly all organize Sabbath-schools and temperance
societies, it is not unreasonable to estimate that more than 10,000
people are every season reached and instructed by the present
pupils of this school, while a still larger number are under the
instruction of former pupils. They, for the most part, find their own
places, collect the pupils, secure a building—either a church, shed or
cabin, or, in lack of these, build a log-house or bush-arbor; and so,
all through the hot months, the work goes on from year to year. The
seed is widely scattered, but it is not lost.
This school bears a very close relation to the special church work of
the Association as well as to the general religious welfare of the
whole people. A large majority of the pupils become Christians
before leaving school, and only one or two have been graduated
without giving evidence of Christian character. There has been
special religious interest every year in the history of the school. One
missionary to Africa and several ministers in active service, caught
their inspiration here.

ITS INFLUENCE.

REV. HORACE BUMSTEAD.

The varied and powerful influence of Atlanta University is seldom

adequately estimated by the casual reader. Situated almost exactly
midway between the Ohio and Mississippi rivers on the one hand,
and the Atlantic and Gulf coast on the other, it has an unsurpassed
opportunity for reaching the colored people of the South. Over most
of this large territory there is no other institution of so high a grade,
the nearest neighbors doing a similar work being Fisk and Straight
Universities at Nashville and New Orleans respectively. It is especially
fortunate in having no sectarian rivals to disturb the harmony with
which it is now doing a broad Christian work for all denominations.
The first and most direct influence of the institution is, of course,
upon its students. An observing visitor, listening to a recitation, or
attending any gathering of the students, can, without much
difficulty, distinguish the recent comers from the older pupils. In
modes of thought and expression, and in the general bearing, the
contrast is usually quite marked. These, however, are only superficial
indications of the deeper change that is commonly wrought in the
entire character. Frivolity is toned down, carelessness corrected,
punctuality secured, a respect for the rugged virtues as well as the
amenities of life stimulated, and, in many cases, a sober and abiding
religious earnestness developed.
The influence of the institution thus imparted to its students, is next
felt by the thousands of younger scholars whom the students gather
into their schools. So, too, the Sunday-schools and Churches with
which they are connected, and the entire communities in which they
move, receive a quickening impulse from their presence. “There are
three of us in that Sunday-school, all with the University ideas,” was
the significant remark of a graduate now teaching in a large
Southern city.
Finally, the influence of Atlanta University upon the Southern white
people themselves has been a marked one. They have repeatedly
and handsomely acknowledged that the success of its instruction has
convinced them that the colored race can receive a high degree of
culture. The demonstration of this fact has an important bearing
upon the whole subject of public education. Not only the colored
people, but the white people of all classes, especially the poorer
classes, will receive great benefit from the quickening of public
sentiment, produced by the success of this institution. The last
official report on Atlanta University, by the Board of Visitors
appointed by the Governor, contains an emphatic recognition of its
very great influence, present and prospective. These are some of the
sentences from that report: “The Board are constrained to say that
the mental training was very satisfactory.” “No school in Georgia ever
had such a field, and its social as well as political power may become
immense.” “The pupils of that school will be the moulders of their
race in the State,” etc., etc. These are the statements of influential
white men in Georgia. Do the people of the North realize how true
they are?

Devotion to Study—Conversions to Christ.

REV. M. O. HARRINGTON, MACON.

Many cases of interest come to notice in connection with our school,

showing the eager thirst for knowledge which these colored people
have. One incident to-day illustrates this. A young man, twenty-two
years of age, who has been connected with the school for a few
weeks, was obliged to go home a few days since, to attend to
matters of business. So anxious was he not to lose his position in his
class, that he started at 2.15 in the morning and walked about forty
miles, reaching Macon at 5 P.M. and this in the severest N. E. rain-
storm of the season. It makes our hearts sad to know of many who
would gladly come to our school, but cannot find boarding places in
town.
The young man mentioned above has since found Christ to be his
Saviour. Rejoice with us! God is visiting us with His Spirit. The
Church is quickened to newness of life, and sinners are converted.
We observed the Week of Prayer; have continued the meetings
every night this week. Some of our strongest and best young men
were the first to start in the new life. All is quiet, but deep and
earnest.

ALABAMA.
Breaking Ground for the New Emerson Institute Building.
PROF. T. N. CHASE.

On the 26th of December, ground was broken for the new Emerson
Institute building at Mobile, with appropriate services. A portion of
Scripture was read, and brief addresses were made by Rev. Mr. Ash,
pastor of the Congregational Church; Rev. Mr. Owens, Baptist; Rev.
Mr. Taylor, Methodist; Mr. Koons, principal of the school; and Prof.
Chase, of Atlanta University. Led by Miss Stevenson, Miss Lord, a
former teacher, and Miss Sawyer, of Talladega College, the pupils of
the school sang “Hold the Fort,” “Thank God for our Country,” “Labor
On,” etc., and Rev. Mr. Davis led in prayer.
In the remarks, Mr. Ash spoke of education in its relation to the
individual, to society, to government, and to the Church. Mr. Owens
said that ignorance was our greatest enemy, and that the building
which was to be erected might be regarded as a fort, from which
guns were to be aimed at this inveterate foe, and exhorted the
people to sustain the teachers who were leading them in their
intellectual and moral warfare. Mr. Koons made a few statements
concerning the school, saying that its aim was not to advance the
interests of any political party or religious sect, but to develop
character and cultivate the minds and hearts of the people. Mr.
Taylor said he had been taught that the negro could not be educated
—that his brains lay in his heels, etc.; but he was glad to see proof
to the contrary in the speeches that had just been made by Mr. Ash
and Mr. Owens. Mr. Chase alluded to the burning of the old Institute,
the causes of delay in rebuilding, the fact that the school was
needed now, and the probability that it always would be.
At the conclusion of these addresses, the old men, headed by Mr.
Taylor, claimed the privilege of removing the first earth; others
followed, without regard to age, color, sex or sect.
The new lot is more accessible to the colored population than the
old one. It is known as Holley’s Garden, and has been a favorite
resort for picnic parties. On account of the great depreciation in real-
estate, the property, containing over two acres, and having on it a
house that will serve as a home for the teachers and accommodate
a few girls as boarders, and covered with nearly a hundred large
shade trees, mostly live-oak, has been purchased for the small sum
of $2,800.
The new building is to be sixty-four feet long and fifty-four in
greatest width, and will accommodate 250 pupils, under five
teachers. Many of the bricks from the old building can be used, since
they were not injured by an excess of water at the time of the fire.

TENNESSEE.
A Debt Extinguisher—The Happiest Girl in the Land.
REV. TEMPLE CUTLER, CHATTANOOGA.

On my return from the campaign in New England, I found the

church in a much better condition than I feared it might be. Except
in the falling off in the weekly offering, I could see no change. They
had been ministered to regularly on Sunday evenings, during my
absence, by Rev. J. C. Irwin, the pastor of the Second Presbyterian
Church.
I was glad to find that a good degree of enthusiasm had been
awakened among them to assist in paying the debt of the A. M. A.
The Church had held a fair during my absence, at which they
realized about $20, which they had forwarded to you. The Band of
Hope had sent about the same amount. Then the band decided to
celebrate the anniversary of their freedom on the first of January—
Emancipation-Day—with a festival, the proceeds of which should be
appropriated to the debt. All the colored people, without regard to
church connection, were invited to be present and contribute to this
object. It was quite a success. The exercises consisted of speaking,
essays and songs, and were very creditable to the performers. The
singing was from the Hampton Cabin Songs, some of which were
new to this section. Among the speeches was one on the
emancipation of the blacks, another on the work of the A. M. A. in
the South, which were well delivered. One essay was on a contrast
between the slave and the freeman. Dr. Lawrence and wife, who
were here on a lecturing tour on temperance, were present. The
doctor made a short address, full of wit and good counsel. The
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