Principles of macroeconomics libby rittenberg and timothy tregarthen pdf

Principles of Microeconomics

By Libby Rittenberg and Timothy Tregarthen

28239-1

Principles of Microeconomics

Libby Rittenberg and Timothy Tregarthen

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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21

Brief Contents

About the Authors Acknowledgments Preface

Economics: The Study of Choice Confronting Scarcity: Choices in Production Demand and Supply Applications of Demand and Supply Elasticity: A Measure of Response Markets, Maximizers, and Efficiency The Analysis of Consumer Choice Production and Cost Competitive Markets for Goods and Services Monopoly The World of Imperfect Competition Wages and Employment in Perfect Competition Interest Rates and the Markets for Capital and Natural Resources Imperfectly Competitive Markets for Factors of Production Public Finance and Public Choice Antitrust Policy and Business Regulation International Trade The Economics of the Environment Inequality, Poverty, and Discrimination Socialist Economies in Transition Appendix A: Graphs in Economics

Index

1

2

4

7Chapter 1

7 8

12 17 21 23

25Chapter 2

25 26 30 40 49 55

57Chapter 3

57 58 65 72 83 88

89Chapter 4

89 90 97

102 107 110

111Chapter 5

111

112 123

Contents

About the Authors

Acknowledgments

Preface

Economics: The Study of Choice

Start Up: Economics in the News Defining Economics The Field of Economics The Economists’ Tool Kit Review and Practice Endnotes

Confronting Scarcity: Choices in Production

Start Up: Tightening Security at the World’s Airports Factors of Production The Production Possibilities Curve Applications of the Production Possibilities Model Review and Practice Endnotes

Demand and Supply

Start Up: Crazy for Coffee Demand Supply Demand, Supply, and Equilibrium Review and Practice Endnotes

Applications of Demand and Supply

Start Up: A Composer Logs On Putting Demand and Supply to Work Government Intervention in Market Prices: Price Floors and Price Ceilings The Market for Health-Care Services Review and Practice Endnotes

Elasticity: A Measure of Response

Start Up: Raise Fares? Lower Fares? What’s a Public Transit Manager To Do? The Price Elasticity of Demand Responsiveness of Demand to Other Factors

127 132 137

139Chapter 6

139 140 149 155 161 165

167Chapter 7

167 168 174 183

192 197

199Chapter 8

199 200 214 219 223

225Chapter 9

225 226 229 239 247 251

253Chapter 10

253 253 258 266 271

275Chapter 11

275

Price Elasticity of Supply Review and Practice Endnotes

Markets, Maximizers, and Efficiency

Start Up: A Drive in the Country The Logic of Maximizing Behavior Maximizing in the Marketplace Market Failure Review And Practice Endnotes

The Analysis of Consumer Choice

Start Up: A Day at the Grocery Store The Concept of Utility Utility Maximization and Demand Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice Review and Practice Endnotes

Production and Cost

Start Up: Street Cleaning Around the World Production Choices and Costs: The Short Run Production Choices and Costs: The Long Run Review and Practice Endnotes

Competitive Markets for Goods and Services

Start Up: Life on the Farm Perfect Competition: A Model Output Determination in the Short Run Perfect Competition in the Long Run Review and Practice Endnotes

Monopoly

Start Up: Surrounded by Monopolies The Nature of Monopoly The Monopoly Model Assessing Monopoly Review and Practice

The World of Imperfect Competition

Start Up: eBay Needs Google, Google Needs eBay, and Neither Trusts the Other

276 283 290 295 298

299Chapter 12

299 301 308 315 322 326

327Chapter 13

327 328 333 341 347 350

351Chapter 14

351 352 362 365 370 374

375Chapter 15

375 375 385 394 398 401

403Chapter 16

403 404 409 412 418 420

Monopolistic Competition: Competition Among Many Oligopoly: Competition Among the Few Extensions of Imperfect Competition: Advertising and Price Discrimination Review and Practice Endnotes

Wages and Employment in Perfect Competition

Start Up: College Pays The Demand for Labor The Supply of Labor Labor Markets at Work Review and Practice Endnotes

Interest Rates and the Markets for Capital and Natural Resources

Start Up: Building the “Internet in the Sky” Time and Interest Rates Interest Rates and Capital Natural Resources and Conservation Review and Practice Endnotes

Imperfectly Competitive Markets for Factors of Production

Start Up: Hockey Players Frozen Out Price-Setting Buyers: The Case of Monopsony Monopsony and the Minimum Wage Price Setters on the Supply Side Review and Practice Endnotes

Public Finance and Public Choice

Start Up: Where Your Tax Dollars Go The Role of Government in a Market Economy Financing Government Choices in the Public Sector Review and Practice Endnotes

Antitrust Policy and Business Regulation

Start Up: The Plastic War Antitrust Laws and Their Interpretation Antitrust and Competitiveness in a Global Economy Regulation: Protecting People from the Market Review and Practice Endnotes

421Chapter 17

421 422 431 433 440 443

445Chapter 18

445 446 455 462 466

467Chapter 19

467 469 474 484 489 493

495Chapter 20

495 496 500 504 510 512

513Chapter 21

513 523 529

539

International Trade

Start Up: Trade Winds The Gains from Trade Two-Way Trade Restrictions on International Trade Review and Practice Endnotes

The Economics of the Environment

Start Up: A Market for Carbon Emissions Maximizing the Net Benefits of Pollution Alternatives in Pollution Control Review and Practice Endnotes

Inequality, Poverty, and Discrimination

Start Up: Poverty in the United States Income Inequality The Economics of Poverty The Economics of Discrimination Review and Practice Endnotes

Socialist Economies in Transition

Start Up: The Collapse of Socialism The Theory and Practice of Socialism Socialist Systems in Action Economies in Transition: China and Russia Review and Practice Endnotes

Appendix A: Graphs in Economics

How to Construct and Interpret Graphs Nonlinear Relationships and Graphs without Numbers Using Graphs and Charts to Show Values of Variables

Index

About the Authors

LIBBY RITTENBERG Libby Rittenberg has been a Professor of Economics at Colorado College in Colorado Springs since 1989. She teaches principles of economics, intermediate macroeconomic theory, comparative economic systems, and international political economy. She received her B. A. in economics-mathematics and Spanish from Simmons College and her Ph.D. in economics from Rutgers University.

Prior to joining the faculty at Colorado College, she taught at Lafayette College and at the Rutgers University Graduate School of Management. She served as a Fulbright Scholar in Istanbul, Turkey, and as a research economist at Mathematica, Inc. in Prin- ceton, New Jersey.

Dr. Rittenberg specializes in the internationally oriented areas of economics, with numerous articles in journals and books on comparative and development economics. Much of her work focuses on transition issues and on the Turkish economy.

She has been very involved in study abroad education and has directed programs in central Europe and Turkey.

TIM TREGARTHEN There is one word that captures the essence of Dr. Timothy Tregarthen—inspiring. Tim was first diagnosed with multiple sclerosis (MS) in 1975. Yet, he continued a remarkable academic career of teaching and research. In 1996, he published the first edition of his principles of economics textbook to great acclaim, and it became widely used in colleges around the country. That same year, MS made him wheelchair-bound. The disease forced his retirement from teaching at the University of Colorado at Colorado Springs in 1998. He lost the use of his arms in 2001 and has been quadriplegic ever since. In 2002, Tim’s doctor expected him to die.

He was placed in the Pikes Peak Hospice program and was twice given his last rites by his priest. UCCS Chancellor Shockley- Zalabak says, “I really thought that Tim would die in hospice. That’s what the doctors told me, and I really believed that. I remember one day they called me and told me to try to come see him. They didn't expect him to live through the night.”

Not only did he live through the night, but he eventually recovered to the point that he moved from hospice to a long-term care facility. There, he never let his disease get him down. In fact, he turned back to his love of writing and teaching for inspiration. He obtained a voice-activated computer, recruited a coauthor, Libby Rittenberg of Colorado College, and turned his attention to revis- ing his principles of economics book. Flat World Knowledge is honored to publish a new, first edition relaunch of this wonderful book, and proud to bring Tim’s incredible talents as a teacher back to life for future generations of students to learn from.

In addition to completing the rewrite of his textbook, Tim recently completed an autobiography about the thirty-two years he has had MS, titled Suffering, Faith, and Wildflowers. He is nearing completion of a novel, Cool Luck, based on the life of a friend. It is the story of a young couple facing the husband’s diagnosis of ALS—Lou Gehrig’s disease. Remarkably, in 2007, he was able to return to the classroom at UCCS, where he had taught economics for twenty-seven years. In January of 2009, Tim married Dinora Montenegro (now Dinora Tregarthen); the couple lives in San Gabriel, California.

Perhaps Tim’s approach to life is best summed up by an observation by UCCS English Professor Thomas Naperierkowski: “One of the remarkable things is, heck, I can wake up with a headache and be a pretty grouchy character, but given his physical trials, which he faces every minute of his life these days, I’ve never seen him grouchy, I’ve never seen him cranky.” Carry on, Tim.

Acknowledgments The authors would like to thank to the following individuals who reviewed the text and whose contributions were invaluable in shaping the final product:

Carlos Aguilar El Paso Community College

Jeff Ankrom Wittenberg University

Lee Ash Skagit Valley Community College

Randall Bennett Gonzaga University

Joseph Calhoun Florida State University

Richard Cantrell Western Kentucky University

Gregg Davis Flathead Valley Community College

Kevin Dunagan Oakton Community College

Mona El Shazly Columbia College

Jose Esteban Palomar College

Maurita Fawls Portland Community College

Fred Foldvary Santa Clara University

Richard Fowles University of Utah

Doris Geide-Stevenson Weber State University

Sarmila Ghosh University of Scranton, Kania School of Management

David Gordon Illinois Valley Community College

Clinton Greene University of Missouri-St. Louis

James Holcomb University of Texas at El Paso

Phil Holleran Mitchell Community College

Yu Hsing Southeastern Louisiana University

Thomas Hyclak Lehigh University

Bruce Johnson Centre College

James Kahiga Georgia Perimeter College

Andrew Kohen James Madison University

Monaco Kristen California State University–Long Beach

Mark Maier Glendale Community College

David McClough Bowling Green State University

Ann McPherren Huntington University

John Min Northern Virginia Community College

Shahriar Mostashari Campbell University, Lundy-Fetterman School of Business

Francis Mummery Fullerton College

Robert Murphy Boston College

Kathryn Nantz Fairfield University

Paul Okello Tarrant County College-South Campus

Nicholas Peppes St. Louis Community College

Ramoo Ratha Diablo Valley College

Teresa Riley Youngstown State University

Michael Robinson Mount Holyoke College

Anirban Sengupta Texas A&M University

John Solow The University of Iowa

John Somers Portland Community College

Charles Staelin Smith College

Richard Stratton The University of Akron

Kay E. Strong Bowling Green State University–Firelands

Della Sue Marist College

John Vahaly University of Louisville

Robert Whaples Wake Forest University

Mark Wheeler Western Michigan University

Leslie Wolfson The Pingry School

Sourushe Zandvakili University of Cincinnati

We would like to extend a special thank you to the following instructors who class tested the text in their courses:

Johnathan Millman University of Massachusetts–Boston

John Min Northern Virginia Community College

Kristen Monaco California State University–Long Beach

Steve Skinner Western Connecticut State University

Richard Stratton University of Akron

ACKNOWLEDGMENTS 3

Preface Greek philosopher Heraclitis said over 2500 years ago that “Nothing endures but change.” Forecasting is a tricky business, but this sentiment strikes us as being as safe a bet as one can make. Change—rapid change—underlies all our lives. As we were completing this textbook, the world entered a period of marked economic uncertainty that led many students, and indeed people from all walks of life, to tune into economic events as never before to try to understand the economic world around them. So, while we as econom- ists have the public’s attention, we see an opportunity to share economics principles and the economic way of thinking in a way that emphasizes their relevance to today’s world. We use applications from sports, politics, campus life, current events, and other familiar settings to illustrate the links between theoretical principles and common experiences. Because of the increasingly global nature of economic activity, we also recognize the need for a clear and consistent international focus throughout an economics text. In addi- tion, we have tried to provide a sense of the intellectual excitement of the field and an appreciation for the gains it has made, as well as an awareness of the challenges that lie ahead.

To ensure students realize that economics is a unified discipline and not a bewildering array of seemingly unrelated topics, we develop the presentation of microeconomics and of macroeconomics around integrating themes.

The integrating theme for microeconomics is the marginal decision rule, a simple approach to choices that maximize the value of some objective. Following its presentation in an early microeconomics chapter, the marginal decision rule becomes an integrating device throughout the discussion of microeconomics. Instead of a hodgepodge of rules for different market conditions, we give a single rule that can be applied within any market setting.

The integrating theme for macroeconomics is the model of aggregate demand and aggregate supply. Following its presentation in an early macroeconomics chapter, this model allows us to look at both short-run and long-run concepts and to address a variety of policy issues and debates.

Recognizing that a course in economics may seem daunting to some students, we have tried to make the writing clear and enga- ging. Clarity comes in part from the intuitive presentation style, but we have also integrated a number of pedagogical features that we believe make learning economic concepts and principles easier and more fun. These features are very student-focused.

The chapters themselves are written using a “modular” format. In particular, chapters generally consist of three main content sections that break down a particular topic into manageable parts. Each content section contains not only an exposition of the ma- terial at hand but also learning objectives, summaries, examples, and problems. Each chapter is introduced with a story to motivate the material and each chapter ends with a wrap-up and additional problems. Our goal is to encourage active learning by including many examples and many problems of different types.

A tour of the features available for each chapter may give a better sense of what we mean: < Start Up—Chapter introductions set the stage for each chapter with an example that we hope will motivate readers to study

the material that follows. These essays, on topics such as the value of a college degree in the labor market or how policy makers reacted to a particular economic recession, lend themselves to the type of analysis explained in the chapter. We often refer to these examples later in the text to demonstrate the link between theory and reality.

< Learning Objectives—These succinct statements are guides to the content of each section. Instructors can use them as a snapshot of the important points of the section. After completing the section, students can return to the learning objectives to check if they have mastered the material.

< Heads Up!—These notes throughout the text warn of common errors and explain how to avoid making them. After our combined teaching experience of more than fifty years, we have seen the same mistakes made by many students. This fea- ture provides additional clarification and shows students how to navigate possibly treacherous waters.

< Key Takeaways—These statements review the main points covered in each content section. < Key Terms—Defined within the text, students can review them in context, a process that enhances learning. < Try It! questions—These problems, which appear at the end of each content section and which are answered completely in

the text, give students the opportunity to be active learners. They are designed to give students a clear signal as to whether they understand the material before they go on to the next topic.

< Cases in Point—These essays included at the end of each content section illustrate the influence of economic forces on real issues and real people. Unlike other texts that use boxed features to present interesting new material or newspaper articles, we have written each case ourselves to integrate them more clearly with the rest of the text.

< Summary—In a few paragraphs, the information presented in the chapter is pulled together in a way that allows for a quick review of the material.

< End-of-chapter concept and numerical problems—These are bountiful and are intended to check understanding, to pro- mote discussion of the issues raised in the chapter, and to engage students in critical thinking about the material. Included are not only general review questions to test basic understanding but also examples drawn from the news and from results of economics research. Some have students working with real-world data.

< Chapter quizzes—Each chapter also includes online, supplementary multiple choice questions that provide students with feedback on both correct and incorrect responses. These provide yet another way for students to test themselves on the material.

ADDITIONAL MATERIAL FOR INSTRUCTORS The authors have been personally involved in the generation of a huge Test Bank that includes multiple choice, true/false, and short essays questions. These questions are scored in terms of level of difficulty and include multiple ways of testing the material.

The Solutions Manual, with which the authors were also involved, contains answers for all concept and numerical problems found at the end of each text chapter.

The PowerPoint Slides include all the exhibits contained in the text to allow ease of use in class. We hope that users will find this text an engaging and enjoyable way of becoming acquainted with economics principles and

that mastery of the material will lead to looking at the world in a deeper and more meaningful way. We welcome all feedback. Libby Rittenberg Timothy Tregarthen

PREFACE 5

6 PRINCIPLES OF MICROECONOMICS

C H A P T E R 1 Economics: The Study of Choice START UP: ECONOMICS IN THE NEWS 2008 seemed to be the year of economic news. From the worst financial crisis since the Great Depression to the

possibility of a global recession, to gyrating gasoline and food prices, and to plunging housing prices, economic

questions were the primary factors in the presidential campaign of 2008 and dominated the news generally.

What causes the prices of some good to rise while the prices of some other goods fall? Price determination is

one of the things that we will study in this book. We will also consider factors that lead an economy to fall into a re-

cession—and the attempts to limit it.

While the investigation of these problems surely falls within the province of economics, economics encom-

passes a far broader range of issues. Ultimately, economics is the study of choice. Because choices range over every

imaginable aspect of human experience, so does economics. Economists have investigated the nature of family life,

the arts, education, crime, sports, job creation—the list is virtually endless because so much of our lives involves

making choices.

How do individuals make choices: Would you like better grades? More time to relax? More time watching

movies? Getting better grades probably requires more time studying, and perhaps less relaxation and entertain-

ment. Not only must we make choices as individuals, we must make choices as a society. Do we want a cleaner en-

vironment? Faster economic growth? Both may be desirable, but efforts to clean up the environment may conflict

with faster economic growth. Society must make choices.

Economics is defined less by the subjects economists investigate than by the way in which economists invest-

igate them. Economists have a way of looking at the world that differs from the way scholars in other disciplines

look at the world. It is the economic way of thinking; this chapter introduces that way of thinking.

economics

A social science that examines how people choose among the alternatives available to them.

scarcity

The condition of having to choose among alternatives.

scarce good

A good for which the choice of one alternative requires that another be given up.

free good

A good for which the choice of one use does not require that another be given up.

1. DEFINING ECONOMICS

L E A R N I N G O B J E C T I V E S

1. Define economics. 2. Explain the concepts of scarcity and opportunity cost and how they relate to the definition of

economics. 3. Understand the three fundamental economic questions: What should be produced? How

should goods and services be produced? For whom should goods and services be produced?

Economics is a social science that examines how people choose among the alternatives available to them. It is social because it involves people and their behavior. It is a science because it uses, as much as possible, a scientific approach in its investigation of choices.

1.1 Scarcity, Choice, and Cost All choices mean that one alternative is selected over another. Selecting among alternatives involves three ideas central to economics: scarcity, choice, and opportunity cost.

Scarcity

Our resources are limited. At any one time, we have only so much land, so many factories, so much oil, so many people. But our wants, our desires for the things that we can produce with those resources, are unlimited. We would always like more and better housing, more and better education—more and bet- ter of practically everything.

If our resources were also unlimited, we could say yes to each of our wants—and there would be no economics. Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. Whether we like it or not, we must make choices.

Our unlimited wants are continually colliding with the limits of our resources, forcing us to pick some activities and to reject others. Scarcity is the condition of having to choose among alternatives. A scarce good is one for which the choice of one alternative requires that another be given up.

Consider a parcel of land. The parcel presents us with several alternative uses. We could build a house on it. We could put a gas station on it. We could create a small park on it. We could leave the land undeveloped in order to be able to make a decision later as to how it should be used.

Suppose we have decided the land should be used for housing. Should it be a large and expensive house or several modest ones? Suppose it is to be a large and expensive house. Who should live in the house? If the Lees live in it, the Nguyens cannot. There are alternative uses of the land both in the sense of the type of use and also in the sense of who gets to use it. The fact that land is scarce means that soci- ety must make choices concerning its use.

Virtually everything is scarce. Consider the air we breathe, which is available in huge quantity at no charge to us. Could it possibly be scarce?

The test of whether air is scarce is whether it has alternative uses. What uses can we make of the air? We breathe it. We pollute it when we drive our cars, heat our houses, or operate our factories. In effect, one use of the air is as a garbage dump. We certainly need the air to breathe. But just as certainly, we choose to dump garbage in it. Those two uses are clearly alternatives to each other. The more garbage we dump in the air, the less desirable—and healthy—it will be to breathe. If we decide we want to breathe cleaner air, we must limit the activities that generate pollution. Air is a scarce good because it has alternative uses.

Not all goods, however, confront us with such choices. A free good is one for which the choice of one use does not require that we give up another. One example of a free good is gravity. The fact that gravity is holding you to the earth does not mean that your neighbor is forced to drift up into space! One person’s use of gravity is not an alternative to another person’s use.

There are not many free goods. Outer space, for example, was a free good when the only use we made of it was to gaze at it. But now, our use of space has reached the point where one use can be an al- ternative to another. Conflicts have already arisen over the allocation of orbital slots for communica- tions satellites. Thus, even parts of outer space are scarce. Space will surely become more scarce as we find new ways to use it. Scarcity characterizes virtually everything. Consequently, the scope of econom- ics is wide indeed.

8 PRINCIPLES OF MICROECONOMICS

opportunity cost

The value of the best alternative forgone in making any choice.

Scarcity and the Fundamental Economic Questions

The choices we confront as a result of scarcity raise three sets of issues. Every economy must answer the following questions:

1. What should be produced? Using the economy’s scarce resources to produce one thing requires giving up another. Producing better education, for example, may require cutting back on other services, such as health care. A decision to preserve a wilderness area requires giving up other uses of the land. Every society must decide what it will produce with its scarce resources.

2. How should goods and services be produced? There are all sorts of choices to be made in determining how goods and services should be produced. Should a firm employ a few skilled or a lot of unskilled workers? Should it produce in its own country or should it use foreign plants? Should manufacturing firms use new or recycled raw materials to make their products?

3. For whom should goods and services be produced? If a good or service is produced, a decision must be made about who will get it. A decision to have one person or group receive a good or service usually means it will not be available to someone else. For example, representatives of the poorest nations on earth often complain that energy consumption per person in the United States is 17 times greater than energy consumption per person in the world’s 62 poorest countries. Critics argue that the world’s energy should be more evenly allocated. Should it? That is a “for whom” question.

Every economy must determine what should be produced, how it should be produced, and for whom it should be produced. We shall return to these questions again and again.

Opportunity Cost

It is within the context of scarcity that economists define what is perhaps the most important concept in all of economics, the concept of opportunity cost. Opportunity cost is the value of the best altern- ative forgone in making any choice.

The opportunity cost to you of reading the remainder of this chapter will be the value of the best other use to which you could have put your time. If you choose to spend $20 on a potted plant, you have simultaneously chosen to give up the benefits of spending the $20 on pizzas or a paperback book or a night at the movies. If the book is the most valuable of those alternatives, then the opportunity cost of the plant is the value of the enjoyment you otherwise expected to receive from the book.

The concept of opportunity cost must not be confused with the purchase price of an item. Con- sider the cost of a college or university education. That includes the value of the best alternative use of money spent for tuition, fees, and books. But the most important cost of a college education is the value of the forgone alternative uses of time spent studying and attending class instead of using the time in some other endeavor. Students sacrifice that time in hopes of even greater earnings in the future or be- cause they place a value on the opportunity to learn. Or consider the cost of going to the doctor. Part of that cost is the value of the best alternative use of the money required to see the doctor. But, the cost also includes the value of the best alternative use of the time required to see the doctor. The essential thing to see in the concept of opportunity cost is found in the name of the concept. Opportunity cost is the value of the best opportunity forgone in a particular choice. It is not simply the amount spent on that choice.

The concepts of scarcity, choice, and opportunity cost are at the heart of economics. A good is scarce if the choice of one alternative requires that another be given up. The existence of alternative uses forces us to make choices. The opportunity cost of any choice is the value of the best alternative forgone in making it.

K E Y T A K E A W A Y S

< Economics is a social science that examines how people choose among the alternatives available to them.

< Scarcity implies that we must give up one alternative in selecting another. A good that is not scarce is a free good.

< The three fundamental economic questions are: What should be produced? How should goods and services be produced? For whom should goods and services be produced?

< Every choice has an opportunity cost and opportunity costs affect the choices people make. The opportunity cost of any choice is the value of the best alternative that had to be forgone in making that choice.

CHAPTER 1 ECONOMICS: THE STUDY OF CHOICE 9

T R Y I T !

Identify the elements of scarcity, choice, and opportunity cost in each of the following:

1. The Environmental Protection Agency is considering an order that a 500-acre area on the outskirts of a large city be preserved in its natural state, because the area is home to a rodent that is considered an endangered species. Developers had planned to build a housing development on the land.

2. The manager of an automobile assembly plant is considering whether to produce cars or sport utility vehicles (SUVs) next month. Assume that the quantities of labor and other materials required would be the same for either type of production.

3. A young man who went to work as a nurses’ aide after graduating from high school leaves his job to go to college, where he will obtain training as a registered nurse.

Case in Point: The Rising Cost of Energy

© 2010 Jupiterimages Corporation

Oil is an exhaustible resource. The oil we burn today will not be available for use in the future. Part of the op- portunity cost of our consumption of goods such as gasoline that are produced from oil includes the value people in the future might have placed on oil we use today.

It appears that the cost of our use of oil may be rising. We have been using “light crude,” the oil found in the ground in deposits that can be readily tapped. As light crude becomes more scarce, the world may need to turn to so-called “heavy crude,” the crude oil that is found in the sandy soil of places such as Canada and Venezuela. That oil exists in such abundance that it propels Venezuela to the top of the world list of available oil. Saudi Arabia moves to the second position; Canada is third.

The difficulty with the oil mixed in the sand is that extracting it is far more costly than light crude, both in terms of the expenditures required and in terms of the environmental damage that mining it creates. Northern Alberta, in Canada, boasts a Florida-sized area whose sandy soils are rich in crude oil. Some of that oil is 1,200 feet underground. Extracting it requires pumping steam into the oily sand and then pumping up the resultant oily syrup. That syrup is then placed into huge, industrial-sized washing machines that separate crude oil. What is left over is toxic and will be placed in huge lakes that are being created by digging pits in the ground 200 feet deep. The oil produced from these sands has become important—Alberta is the largest foreign supplier of oil to the United States.