Essentials of Economics
Fifth Edition
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2022
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Authorised adaptation from the United States edition entitled Economics, 8th edition, ISBN 9780135957554 by Hubbard, Glenn R. and O’Brien, Anthony Patrick; published by Pearson Education, Inc., Copyright © 2021.
Fifth adaptation edition published by Pearson Australia Group Pty Ltd, Copyright © 2022
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ISBN 9780655702870
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Brief Contents
Part 1 Introduction
Chapter 1 Economics: foundations and ideas 2
Appendix Using graphs and formulas 22
Chapter 2 Choices and trade-offs in the market 34
Part 2 How the market works
Chapter 3 Where prices come from: the interaction of demand and supply 58
Appendix Behavioural economics: do people make rational choices? 90
Chapter 4 Elasticity: the responsiveness of demand and supply 98
Chapter 5 Economic efficiency, government price-setting and taxes 132
Part 3 Firms and market structures
Chapter 6 Technology, production and costs 162
Chapter 7 Firms in perfectly competitive markets 190
Chapter 8 Monopoly markets 224
Chapter 9 Monopolistic competition and oligopoly 262
Part 4 Markets for factors of production
Chapter 10 The markets for labour and other factors of production 300
Part 5 The role of government
Chapter 11 Externalities, environmental policy and public goods 340
Chapter 12 Social policy and inequality 384
Part 6 Macroeconomic foundations
Chapter 13 Gross domestic product and economic growth 412
Chapter 14 Unemployment and inflation 450
Appendix Is there a short-run trade-off between unemployment and inflation? 488
Chapter 15 Aggregate demand and aggregate supply analysis 492
Appendix The aggregate expenditure model 532
Part 7 Monetary and fiscal policy
Chapter 16 Money, banks and the Reserve Bank of Australia 540
Chapter 17 Monetary policy 568
Chapter 18 Fiscal policy 596
Appendix A closer look at the multiplier 632
Part 8 The international economy
Chapter 19 International trade 640
Chapter 20 International finance and exchange rates 672
Glossary 712
Index 719
Detailed Contents
About the authors xvii
Reviewers xviii
Preface xix
Solving learning and teaching challenges xx
Special features xxii
Resources for educators and students xxviii
Part 1 Introduction 1
Chapter 1 Economics: foundations and ideas 2
Three key economic ideas 4
People are rational 4
People respond to economic incentives 5
Optimal decisions are made at the margin 5
Solved problem 1.1 Apple makes a decision at the margin 6
Scarcity, trade-offs and the economic problem that every society must solve 6
What goods and services will be produced? 6
How will the goods and services be produced? 7
Who will receive the goods and services produced? 7
Centrally planned economies versus market economies 7
The modern ‘mixed’ economy 8
Efficiency and equity 8
Economic models 9
The role of assumptions in economic models 10
Forming and testing hypotheses in economic models 10
Normative and positive analysis 11
Don’t let this happen to you Don’t confuse positive analysis with normative analysis 11
Economics as a social science 12
Making the connection 1.1 Good economics doesn’t always mean good politics 12
Microeconomics and macroeconomics 13
Economic skills and economics as a career 13
Conclusion 15
An inside look Jobs are changing, and fast. Here’s what the VET sector (and employers) need to do to keep up. 16
Chapter summary and problems 18
Chapter 1 Appendix 22
Using graphs and formulas 22
Graphs of one variable 23
Graphs of two variables 24
Positive and negative relationships 26
Formulas 30
Appendix Problems 32
Chapter 2 Choices and trade-offs in the market 34
Production possibility frontiers and real-world trade-offs 36
Graphing the production possibility frontier 36
Making the connection 2.1 Trade-offs and emergency aid relief 37
Increasing marginal opportunity costs 38
Economic growth 39
Comparative advantage and trade 40
Specialisation and gains from trade 40
Absolute advantage versus comparative advantage 41 Don’t let this happen to you Don’t confuse absolute advantage with comparative advantage 42
Comparative advantage and the gains from trade 42
Solved problem 2.1 Comparative advantage and the gains from trade 43
The market system 44
The gains from free markets 44
The market mechanism 45
Making the connection 2.2 Story of the market system in action: I, Pencil 45
The role of the entrepreneur in the market system 46
The legal basis of a successful market system 47
Protection of private property 47
Making the connection 2.3 Illegal downloads from cyberspace 48
Enforcement of contracts and property rights 48
Conclusion 49
An inside look Expansion and production mix at BMW 50
Chapter summary and problems 52
Part 2 How the market works 57
Chapter 3 Where prices come from: the interaction of demand and supply 58
The demand side of the market 60
Demand schedules and demand curves 60
The law of demand 60
Holding everything else constant: the ceteris paribus condition 61
What explains the law of demand? 61
Variables that shift market demand 62
Making the connection 3.1 Virtual reality headsets: will a substitute fail for a lack of complements? 63
Making the connection 3.2 The ageing of the Baby Boom generation 66
A change in demand versus a change in quantity demanded 66
The supply side of the market 67
Supply schedules and supply curves 67
The law of supply 67
Variables that shift supply 68
A change in supply versus a change in quantity supplied 70
Market equilibrium: putting demand and supply together 71 How markets eliminate surpluses and shortages 72
Demand and supply both count 73
Shifts in a curve versus movements along a curve 73 Don’t let this happen to you Remember: a change in a good’s price does not cause the demand or supply curve to shift 73
The effect of demand and supply shifts on equilibrium 74
The effect of shifts in supply on equilibrium 74
The effect of shifts in demand on equilibrium 74
The effect of shifts in demand and supply over time 74
Solved problem 3.1 Demand and supply both count: pharmacists and accountants 76
Making the connection 3.3 The rise and rise of fitness trackers 77
Solved problem 3.2 Demand and supply both count: the Australian housing market 78
Conclusion 81
An inside look Eminent mobility 82
Chapter summary and problems 84
Chapter 3 Appendix 90
Behavioural economics: do people make rational choices? 90
Pitfalls in decision-making 90
Ignoring non-monetary opportunity costs 90
Making the connection 3A.1 Experimental economics: a test of fairness? 91
Business implications of consumers ignoring nonmonetary opportunity costs 92
Failing to ignore sunk costs 92
Making the connection 3A.2 A blogger who understands the importance of ignoring sunk costs? 93
Being unrealistic about future behaviour 93
Solved problem 3A.1 How do you get people to save more of their income? 94
Appendix Summary and problems 95
Chapter 4 Elasticity: the responsiveness of demand and supply 98
Price elasticity of demand and its measurement 100
Measuring the price elasticity of demand 100
Elastic demand and inelastic demand 101
An example of calculating price elasticities 101
The midpoint formula 102
Solved problem 4.1 Calculating the price elasticity of demand for wheat using the midpoint formula 103
When demand curves intersect, the flatter curve is more elastic 104
Polar cases of perfectly elastic and perfectly inelastic demand 104
Don’t let this happen to you Don’t confuse inelastic with perfectly inelastic 106
The determinants of the price elasticity of demand 106
Availability of close substitutes 106
Passage of time 107
Luxuries versus necessities 107
Solved problem 4.2 Using price elasticity to analyse the drug problem 107
Definition of the market 108
Share of the good in the consumer’s budget 108
The relationship between price elasticity and total revenue 108
Making the connection 4.1 Amazon and Netflix test the price elasticity of demand for their services 110
Elasticity and revenue with a linear demand curve 111
Solved problem 4.3 Price and revenue don’t always move in the same direction 112
Estimating price elasticity of demand 112
Other demand elasticities 112
Cross-price elasticity of demand 112
Income elasticity of demand 113
Making the connection 4.2 Using elasticity to analyse the disappearing family farm 114
The price elasticity of supply and its measurement 115
Measuring the price elasticity of supply 115
Determinants of the price elasticity of supply 116
Making the connection 4.3 Why are oil prices so unstable? 117
Polar cases of perfectly elastic and perfectly inelastic supply 118
Using price elasticity of supply to predict changes in price 120
Conclusion 121
An inside look When do flight prices drop? 123
Chapter summary and problems 125
Chapter 5 Economic efficiency, government price-setting and taxes 132
Consumer surplus and producer surplus 134
Consumer surplus 134
Producer surplus 136
Making the connection 5.1 The consumer surplus from Uber 136
What consumer surplus and producer surplus measure 137
The efficiency of competitive markets 138
Marginal benefit equals marginal cost in competitive equilibrium 138
Economic surplus 139
Deadweight loss 139
Economic surplus and economic efficiency 140
Government intervention in the market: price floors and price ceilings 140
Price floors: the example of agricultural markets 141
Price ceilings: the example of rent controls 142
Making the connection 5.2 Price floors in labour markets: the minimum wage 143
Black markets and peer-to-peer sites 144
Don’t let this happen to you Don’t confuse scarcity with a shortage 144
Solved problem 5.1 What is the economic effect of a black market for apartments? 145
The results of government intervention: winners, losers and inefficiency 146
Making the connection 5.3 Price controls lead to economic crisis in Venezuela 146
Positive and normative analysis of price ceilings and price floors 148
The economic impact of taxes 148
The effect of taxes on economic efficiency 148
Tax incidence: who actually pays a tax? 149
Solved problem 5.2 When do consumers pay all of a sales tax increase? 150
Conclusion 152
An inside look The price of cigarettes will rise in Australia from today 153
Chapter summary and problems 155
Part 3 Firms and market structures 161
Chapter 6 Technology, production and costs 162
Technology: an economic definition 164
The short run and the long run in economics 164
The difference between fixed costs and variable costs 164
Making the connection 6.1 Improving inventory control at Bunnings 165
Implicit costs versus explicit costs 165
Making the connection 6.2 Fixed costs in the publishing industry 166
The production function 166
A first look at the relationship between production and cost 167
The marginal product of labour and the average product of labour 167
The law of diminishing returns 169
Making the connection 6.3 Adam Smith’s famous account of the division of labour in a pin factory 169
The relationship between marginal product and average product 170
Graphing production 170
The relationship between short-run production and shortrun cost 172
Marginal cost 172
The relationship between marginal cost and average total cost 172
Solved problem 6.1 The relationship between marginal cost and average total cost 173
Graphing cost curves 174
Costs in the long run 176
Economies of scale 176
Long-run average cost curves for bookshops 176
Solved problem 6.2 Using long-run average cost curves to understand business strategy 178
Making the connection 6.4 The colossal River Rouge: diseconomies of scale at the Ford Motor company 179
Don’t let this happen to you Don’t confuse diminishing returns with diseconomies of scale 179
Conclusion 181
An inside look Tesla's new battery technology could drive down cost of electric cars, company says 182
Chapter summary and problems 184
Chapter 7 Firms in perfectly competitive markets 190
Perfectly competitive markets 192
A perfectly competitive firm cannot affect the market price 193
The demand curve for the output of a perfectly competitive firm 193
Don’t let this happen to you 7.1 Don’t confuse the demand curve for Farmer Jones’ oats with the market demand curve for oats 195
How a firm maximises profit in a perfectly competitive market 195
Revenue for a firm in a perfectly competitive market 195
Determining the profit-maximising level of output 196
Illustrating profit or loss on the cost curve graph 198 Showing profit on the graph 199
Solved problem 7.1 Determining profitmaximising price and quantity 199
Don’t let this happen to you 7.2 Remember that firms maximise total profit, not profit per unit 201
Illustrating when a firm is breaking even or operating at a loss 202
Deciding whether to produce or to shut down in the short run 202
Solved problem 7.2 When to shut down a farm 203
Making the connection 7.1 Losing money in the restaurant business 204
The supply curve of the firm in the short run 205
The market supply curve in a perfectly competitive industry 206
‘If everyone can do it, you can’t make money at it’—the entry and exit of firms in the long run 206
Economic profit and the entry or exit decision 206
Long-run equilibrium in a perfectly competitive market 209
The long-run supply curve in a perfectly competitive market 209
Increasing-cost and decreasing-cost industries 212
Making the connection 7.2 In the App Store, easy entry makes the long run pretty short 212
Perfect competition and economic efficiency 213
Productive efficiency 213
Allocative efficiency 213
Dynamic efficiency 213
Solved problem 7.3 How productive efficiency and dynamic efficiency benefit consumers 214
Conclusion 215
An inside look Taxi boss says Ola and Didi won’t catch Uber 216
Chapter summary and problems 218
Chapter 8 Monopoly markets 224
Is any firm ever really a monopoly? 226
Where do monopolies come from? 226
Making the connection 8.1 Does Hasbro have a monopoly on Monopoly? 227
Entry blocked by government action 227
Control of a key resource 228
Network externalities 228
Making the connection 8.2 Are diamond (profits) forever? The De Beers diamond monopoly 229
Natural monopoly 230
How does a monopoly choose price and output? 231
Marginal revenue 231
Profit maximisation for a monopolist 233
Solved problem 8.1 Finding profit-maximising price and output for a monopolist 234
Don’t let this happen to you Don’t assume that charging a higher price is always more profitable for a monopolist 235
Does monopoly reduce economic efficiency? 235
Comparing monopoly and perfect competition 235
Measuring the efficiency losses from monopoly 236
How large are the efficiency losses due to monopoly? 237
Market power and technological change 237
Price discrimination: charging different prices for the same product 238
The requirements for successful price discrimination 238
Solved problem 8.2 How Dell Technologies uses price discrimination to increase profits 240
Airlines: the kings of price discrimination 241
Big data and dynamic pricing 242
Perfect price discrimination 243
Price discrimination across time 244
Government policy towards monopolies 245
Trade practices laws and enforcement 245
