Principles of Economics with ActiveEcon CD (6th Edition)

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9780130737724: Principles of Economics with ActiveEcon CD (6th Edition)

For undergraduate courses in Principles of Economics.Written by two highly respected economists and educators, the text uses the "Stories, Graphs, and Equations" approach to make economic concepts accessible and relevant to students with various learning styles. Known for its unified and logical structure, lively writing style, clear explanations and unparalleled supplements package, the text supports both the instructor and the student through this first, often challenging, economics course. Case/Fair is one of the most widely adopted texts in this market, nationwide!

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About the Author:

Karl E. Case is the Katherine Coman and A. Barton Hepburn Professor of Economics at Wellesley College where he has taught for 24 years and is a Visiting Scholar at the Federal Reserve Bank of Boston.

Before coming to Wellesley, he served as Head Tutor (director of undergraduate studies) at Harvard, where he won the Allyn Young Teaching Prize. He has been a member of the AEA's Committee on Economic Education and was Associate Editor of the Journal of Economic Education, responsible for the section on innovations in teaching. He teaches at least one section of the principles course every year.

Professor Case received his B.A. from Miami University in 1968, spent three years on active duty in the Army including a year in Vietnam, and received his Ph.D. in Economics from Harvard University in 1976.

Professor Case's research has been in the areas of real estate, housing, and public finance. He is author or coauthor of five books, including Principles of Economics, Economics and Tax Policy, and Property Taxation: The Need for Reform and has published numerous articles in professional journals.

He is also a founding partner in the real estate research firm of Case Shiller Weiss, Inc. and serves as a member of the Boards of Directors of the Mortgage Guaranty Insurance Corporation (MGIC), Century Bank, The Lincoln Institute of Land Policy, and the New England Economic Project.

Ray C. Fair is Professor of Economics at Yale University. He is a member of the Cowles Foundation at Yale and a Fellow of the Econometric Society. He received a B.A. in economics from Fresno State College in 1964 and a Ph.D. in economics from M.I.T. in 1968. He taught at Princeton University from 1968 to 1974 and has been at Yale since 1974.

Professor Fair's research has primarily been in the areas of macroeconomics and econometrics, with particular emphasis on macroeconometric model building. His publications include Specification, Estimation, and Analysis of Macroeconometric Models (Harvard Press, 1984) and Testing Macroeconometric Models (Harvard Press, 1994).

Professor Fair has taught introductory and intermediate macroeconomics at Yale. He has also taught graduate courses in macroeconomic theory and macroeconometrics.

Professor Fair's United States and multicountry models are available for use on the Internet free of charge. The address is Many teachers have found that having students work with the United States model on the Internet is a useful complement to even an introductory macroeconomics course.

Excerpt. © Reprinted by permission. All rights reserved.:

At the end of 2000 the United States was in its tenth consecutive year of an economic expansion, the longest in the country's history. Unemployment was at its lowest since 1970, productivity growth was high, and although oil prices had risen sharply, inflation was low. Chronic federal budget deficits had turned into budget surpluses; the Asian economies that suffered sharp downturns in 1998 were recovering fairly well (except for Japan); and even the transitional economies in Eastern Europe and Russia seemed to have turned the corner with reasonable rates of growth. Presidential candidates George W. Bush and Al Gore slugged it out in the fall of 2000 over alternative tax cut and social security proposals.

Perhaps the greatest change in the past three years has been the dramatic emergence of the technology-based "new economy." There can be no question that the dawn of the information age and the power of the Internet have changed the economy in ways that we do not yet fully understand. It has led to increased productivity, new products, and the transformation of many markets. What we don't know is how it will play out in the long run. Will the stock market continue to produce extraordinary returns to investors?

As this edition goes to press there are signs that the US. economy may be slowing down. President-elect George W. Bush and his economic advisors expressed concern in mid December about a possible recession in 2001, and the Federal Reserve stated after its December 19, 2000, meeting that the risks were "weighted mainly toward conditions that may generate economic weakness in the foreseeable future." Others, however, were concerned that inflation may be a problem in the future because of tight labor markets and possible lagged responses to higher oil prices.

How rapidly times change. It has been our goal in writing this sixth edition to highlight many of these changes and the debates surrounding them. It is not our role to forecast future events. It is rather our goal in revising the text to set the discussion in an up-to-date world context and to highlight what we do and do not understand about it.

More than one million students have used Principles of Economics or one of its split volumes. We have made every effort in this new edition to be responsive to our readers' suggestions while maintaining the book's basic focus and pedagogical organization.


Despite major revisions and new features, the themes of the sixth edition are the same themes of the first five editions. The purpose of this book is to introduce the discipline of economics and to provide a basic understanding of how economies function. This requires a blend of economic theory institutional material, and real-world applications. We have maintained a balance between these ingredients in every chapter in this book.


Professors who teach principles of economics are faced with a classroom of students with different abilities, backgrounds and learning styles. For some, analytical material is difficult no matter how it is presented; for others, graphs and equations seem to come naturally. The problem facing instructors and textbook authors is how to convey the core principles of the discipline to as many students as possible without selling the better students short.

Our approach to this problem is to present each core concept in three ways:

  • First, each concept is presented in the context of a simple intuitive story or illustrative example in words followed by a numerical illustration.
  • Second, the numerical example is presented graphically.
  • And finally, where appropriate, equations are used.

Perhaps the best example of our approach can be found in Chapter 7, "Short-Run Costs and Output Decisions," where we show an independent accountant facing diminishing returns.


Although we have chosen to present microeconomics first, we have designed the text so that professors may proceed directly to macroeconomics after teaching the four introductory chapters.

The organization of the microeconomic chapters continues to reflect our belief that the best way to understand how market economies operate—and the best way to understand basic economic theory—is to work through the perfectly competitive model first, including discussions of output and input markets and the connections between them, before turning to noncompetitive market structures. When students understand how a simple competitive system works, they can start thinking about how the pieces of the economy "fit together." We think this is a better approach to teaching economics than some of the more traditional approaches, which encourage students to think of economics as a series of disconnected alternative market models.

Doing competition first also enables students to see the power of the market system. It is impossible to discuss the things that markets do well until students have seen how a simple system determines the allocation of resources. This is our purpose in Chapters 5-10. Chapter 11, "General Equilibrium and the Efficiency of Perfect Competition," remains a pivotal chapter that links the world of perfect competition with the imperfect world of noncompetitive markets, externalities, imperfect information, and poverty, all of which we discuss in Chapters 12-15 . The accompanying visual gives you an overview of our structure.

To visually reinforce basic connections between and among markets, we use the circular flow diagram. This diagram is introduced in Chapter 3 and recurs in Chapters 5, 6, 9, and 11. We believe strongly that students need to be continuously reminded that the material presented in each chapter builds upon the material in earlier chapters and is connected to material in later chapters. Throughout the entire book, the material in the diagrams that relates to the behavior of firms is illustrated in red while the material that relates to the behavior of households is illustrated in blue.


As in the fifth edition, the macroeconomics section begins with three introductory chapters (16-18) that introduce students to macroeconomic tools, national income accounting, and inflation and unemployment (both in the United States and abroad). Descriptive coverage of long-run and short-run growth appears in Chapter 18. We reserve analytical coverage of growth for Chapter 28. Chapters 16-18 are followed by two chapters that present the basic functioning of the goods market (Chapters 19 and 20) and two chapters that present the basic functioning of the money market (Chapters 21 and 22). These four chapters introduce students to the concepts of fiscal and monetary policy. These chapters are followed by a chapter that brings the two markets together. This chapter, Chapter 23, does, in essence, a very simplified version of IS/LM analysis verbally. (The IS and LM curves are included in an appendix to Chapter 23 for those instructors who are interested in teaching them.)

We remain committed to the view that it is a mistake simply to throw aggregate demand and aggregate supply curves at students in the first few chapters of a principles book. To understand the AS and AD curves, students need to know about the functioning of both the goods market and the money market. The logic behind the simple demand curve is simply wrong when applied to the relationship between aggregate demand and the price level. Similarly, the logic behind the simple supply curve is wrong when applied to the relationship between aggregate supply and the price level.

Part of teaching economics is teaching economic reasoning. Our discipline is built around deductive logic. Once we teach students a pattern of logic, we want and expect them to apply it to new circumstances. When they apply the logic of a simple demand curve or simple supply curve to the aggregate demand or aggregate supply curve, the logic does not fit. We believe the best way to teach the reasoning embodied in the aggregate demand and aggregate supply curves without creating serious confusion is to build up to them carefully.

Given the groundwork that has been laid in Chapter 23, Chapter 24 proceeds directly to derive the aggregate demand curve and then the aggregate supply curve. The two curves are then put to determine the aggregate price level and to discuss the various theories of inflation.

Following the development of the AD and AS curves, we turn to a more detailed look at the labor market in Chapter 25 and discuss various theories of unemployment. By the end of Chapter 25, students have put the goods market, the money market, and the labor market together, and they have analyzed inflation, unemployment, and monetary and fiscal policy. Chapter 26 uses the material learned earlier to analyze a number of current macroeconomic issues, including proposed balanced-budget legislation and business cycles in Europe and Asia.

In Chapter 27, we take a closer look at the behavior of households and firms in the macroeconomy. The chapter can be skipped without losing the flow of the material. We close the macroeconomic section of the book by looking at economic growth and productivity (Chapter 28) and some current debates in macroeconomics (Chapter 29). The following visual provides an overview of our structure:

In macroeconomics, the circular flow of payments is used to visually reinforce concepts. This diagram recurs in various forms in Chapters 16, 20, and 21. Once again, throughout the entire book, the material in these diagrams related to the behavior of firms is illustrated in red while material related to the behavior of households is illustrated in blue.


In preparing the sixth edition, we have maintained the two innovations we introduced in the second edition. The first of these is the treatment of aggregate supply. Clearly, there is strong disagreement among economists and across economics textbooks on the exact nature of the aggregate supply curve. All economists agree that if input prices rise at the same rate as output prices, the aggregate supply curve is vertical; firms have no incentive to change out-put if their costs and revenues change at the same rate. For the AS curve to have a positive slope in the short run, input prices must either be constant or there must be some lag in their adjustment.

Some textbooks assume that input prices are constant when the overall price level changes, essentially treating the aggregate supply curve as if it were the sum of individual market supply curves. This assumption of constant input prices is obviously unrealistic, and in the second edition we changed our description of the short-run AS curve to one that simply assumes some lags in input price adjustment when the overall price level changes. In addition, we clarified and expanded our description of the long-run aggregate supply curve, incorporating the concept of potential GDP.

Second, we continue to distinguish between inflation (a change in the overall price level) and sustained inflation (an increase in the overall price level that continues for some period of time). There can be confusion in students' minds as to what inflation is and whether or not it is a purely monetary phenomenon, and we think that this distinction helps to clarify our discussions.


We continue to integrate international examples in three ways. First, we discuss international examples and applications in boxed features that appear in most chapters. We have also integrated international examples directly into the text whenever appropriate. All international examples are listed in a table following the book's detailed table of contents. Second, we introduce imports and exports into the simple goods market model early in macroeconomics. Third, we continue to believe that a complete treatment of open market macroeconomics should not be taught until students have mastered the logic of a simple closed macroeconomy. For this reason, we have chosen to place the "open-economy macroeconomics" chapter in the final part of the book, entitled, "The World Economy."


We developed our revision plan based on reviews, market surveys, and focus groups with over 40 professors as well as our own teaching experiences. Our goals for the sixth edition were to:

  1. Streamline the book without sacrificing core concepts.
  2. Integrate print, CD-ROM, and Web technologies.
  3. Increase coverage of growth and make it flexible.
  4. Update data and examples.
  5. Improve the pedagogical features.


Revising a book involves adding new material, and there is a tendency for textbooks to grow in volume over time. However, student time is a scarce resource, and longer books are more costly to produce. Therefore, our goal throughout was to update, refine, and add material where needed, but to end up cutting excess baggage and obsolete material wherever possible. The bottom line is that the sixth edition contains five fewer chapters than the previous edition and is over 150 pages shorter.

Based on extensive market research, we discovered that many professors did not have the time to cover certain chapters, or they found selected chapters could be either streamlined and merged or moved to the book's supporting Web site. We used these recommendations to implement the following changes:

  • Streamlined previous edition Chapter 15, "Antitrust Policy and Regulation" and merged content with new Chapter 12, "Monopoly and Antitrust Policy."
  • Streamlined previous edition Chapter 18, "Public Finance: The Economics of :Vexation" and merged content with new Chapter 14, "Externalities, Public Goods, Imperfect Information, and Social Choice," and Chapter 15, "Income Distribution and Poverty."
  • Streamlined and merged previous edition Chapter 37, "Economic Growth in Developing Nations" and Chapter 38, "Economies in Transition and Alternative Economic Systems" into new Chapter 32, "Economic Growth in Developing and Transitional Economies."
  • Posted 3 chapters to the book's Web site at Previous edition's Chapter 3, "The Structure of the U.S. Economy: The Private, Public and International Sectors," Chapter 19, "The Economics of Labor Markets and Labor Unions," and Chapter 20, "Current Topics in Applied Microeconomics: Health Care, Immigration, and Urban Problems." The key concepts from previous edition Chapter 3 appear in new edition Chapters 11-15, 30, and 31. The land and labor markets are covered in new edition Chapter 9. Health care and urban problems are covered in new edition Chapter 15.
  • Posted the "Case Studies" and the "Fast Facts" features on the book's Web site.


A new, interactive ActiveEcon CD-ROM can be shrink-wrapped with this book for a small charge. It includes chapter summaries and outlines, self-assessment quizzes, key term definitions, and further explanations. Active Graphs are a key feature of the CD-ROM. Each Active Graph allows students to change the value of a variable and look at the effects on the equilibrium. Fifty-nine Active Graphs are referenced in the book with thi...

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