ECONOMICS - in Harcourt Publishing Company, Attn: ... Sally Meek has been teaching Economics, ... 1 Unemployment in Today’s Economy 382

Concepts and ChoicesECONOMICS

Concepts and ChoicesECONOMICS

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Consultants and Reviewers

Senior ConsultantsSally Meek has been teaching Economics, AP Microeconomics, and AP Macroeconomics in the Plano Independent School District in Plano, Texas since 1987. She has served as an AP Economics reader since 1998, and is currently a Lead Consultant for AP Economics at Summer Institutes for universities across Texas and a member of the AP Economics Test Development Committee. Additionally, Ms. Meek serves on the National Assessment of Educational Progress Economics Steering Committee and as a test item writer. She served as President of the Global Association of Teachers of Economics and addressed the National Summit on Economic and Financial Literacy in 2005. In 2004, Ms. Meek co-founded the North Texas TINSTAAFL Society and was on the National Council on Economic Education (NCEE) Virtual Economics 3.0 Design Committee. She has received the Southwest College Board Advanced Placement Special Recognition Award and the GATE Distinguished Service Award. Ms. Meek earned her B.A. in political science at the University of Texas at Dallas and her M.Ed. in Secondary Education with a content emphasis on Economics from the University of North Texas.

John Morton is Senior Program Officer for the Arizona Council on Economic Education. He taught economics for 31 years at the high school and university levels. Mr. Morton founded and directed the Center for Economic Education at Governors State University in Illinois for 15 years and founded and served as president of the Arizona Council on Economic Education for 4 years. He served as vice president for program development at the National Council on Economic Education (NCEE) for 5 years. He has authored or co-authored more than 80 publications and chaired the advisory board of The Wall Street Journal Classroom Edition from 1991 to 2000. Mr. Morton has won the Leavey Award from the Freedoms Foundation, as well as the Bessie B. Moore Service Award and the John C. Schramm Leadership Award from NCEE and the National Association of Economic Educators. He earned his M.A. from the University of Illinois and pursued postgraduate work at the University of Chicago.

Mark C. Schug is Emeritus Professor and Director of the University of Wisconsin-Milwaukee Center for Economic Education and serves as a Senior Fellow for the National Council for Economic Education. He has taught for over 35 years at the middle school, high school, and university levels. Dr. Schug has written and edited over 180 publications. Additionally, he edited The Senior Economist for the National Council on Economic Education (NCEE) from 1986–1996. Dr. Schug often speaks and writes about economic and financial education, mar-ket-based reforms in education, and issues in urban schools, and has addressed local, state, national, and international groups. Similarly, he has done training programs for teachers in several states across the nation. Dr. Schug earned his Ph.D. from the University of Minnesota.

iv

Teacher ConsultantsThe following educators provided ongoing review during the development of the program.

Sheri PerezMesa Community CollegeMesa, Arizona

Bill SmileyLeigh High School (retired)San Jose, California

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Douglas YoungCroton-Harmon High SchoolCroton-on-Hudson, New York

Content ReviewersThe content reviewers evaluated the text for depth, accuracy, and clarity in the use of economics concepts.

Joanne BenjaminBoard of Directors, California Council on Economic EducationPresident, California Association of School Economics TeachersSan Bernardino, California

Joseph CalhounAssistant Director, Stavros Center for Economic EducationFlorida State UniverisityTallahassee, Florida

R. J. CharkinsExecutive Director, California Council on Economic EducationSan Bernardino, California

Sarah E. CulverDirector, UAB Center for Economic EducationUniversity of Alabama-BirminghamBirmingham, Alabama

Beth S. EcksteinDirector, Center for Economic Education College of Business, East Carolina UniversityGreenville, North Carolina

Gail A. HawksDirector, Center for Economic EducationMiami-Dade Community CollegeMiami, Florida

Gary A. HooverAssociate Professor of EconomicsUniversity of AlabamaTuscaloosa, Alabama

Mary Anne PettitAssociate Director, Offi ce of Economic EducationSouthern Illinois University-EdwardsvilleEdwardsville, Illinois

Dennis PlaconeDirector, Clemson University Center for Economic EducationClemson UniversityClemson, South Carolina

Jennifer ThomasSenior Director of Operations, Florida Council on Economic EducationLargo, Florida

Teacher ReviewersThe following teachers and administrators reviewed the text for its appropriateness for use in high school economics programs.

Julie BarkerPittsford Mendon High SchoolPittsford, New York

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Gerald TaylorSEED SchoolWashington, D.C.

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vi Contents

ECONOMICS: Concepts and Choices

Economic Atlas and Statistics A1

Strategies for Taking Tests S1

Strategies for Studying EconomicsTest Practice

UNIT 1 Economics and Choice

Chapter 1 The Economic Way of Thinking 21 Scarcity: The Basic Economic Problem 4

2 Economic Choice Today: Opportunity Cost 12

3 Analyzing Production Possibilities 18

4 The Economist’s Toolbox 24

Case Study: The Real Cost of Expanding O’Hare Airport 32

Chapter 2 Economic Systems 361 Introduction to Economic Systems 38

2 Command Economies 42

3 Market Economies 48

4 Modern Economies in a Global Age 58

Case Study: Contrasting Economies: North Korea and South Korea 164

Chapter 3 The American Free Enterprise System 68

1 Advantages of the Free Enterprise System 70

2 How Does Free Enterprise Allocate Resources? 78

3 Government and Free Enterprise 84

Case Study: The United States: Land of Entrepreneurs 92

M I C R O E C O N O M I C S

UNIT 2 Market Economies at Work

Chapter 4 Demand 961 What Is Demand? 98

2 What Factors Affect Demand? 106

3 What Is Elasticity of Demand? 116

Case Study: Fueling Automobile Demand 124

Chapter 5 Supply 1281 What Is Supply? 130

2 What Are the Costs of Production? 138

3 What Factors Affect Supply? 146

4 What Is Elasticity of Supply? 154

Case Study: Robots—Technology Increases Supply 158

Chapter 6 Demand, Supply, and Prices 1621 Seeking Equilibrium: Supply and Demand 164

2 Prices as Signals and Incentives 174

3 Intervention in the Price System 180

Case Study: Prices for Concert Tickets 186

Chapter 7 Market Structures 1901 What Is Perfect Competition? 192

2 The Impact of Monopoly 198

3 Other Market Structures 206

4 Regulation and Deregulation Today 214

Case Study: Competition in Gadgets and Gizmos 220

M I C R O E C O N O M I C S

UNIT 3 Partners in the American Economy

Chapter 8 Types of Business Organizations 2241 Sole Proprietorships 226

2 Forms of Partnerships 232

3 Corporations, Mergers, and Multinationals 238

4 Franchises, Co-ops, and Nonprofits 248

Case Study: Apple: The Evolution of One Company 252

Chapter 9 The Role of Labor 2561 How Are Wages Determined? 258

2 Trends in Today’s Labor Market 266

3 Organized Labor in the United States 274

Case Study: Managing Change in Your Work Life 282

M A C R O E C O N O M I C S

UNIT 4 Money, Banking, and Finance

Chapter 10 Money and Banking 2861 Money: Its Functions and Properties 288

2 The Development of U.S. Banking 296

3 Innovations in Modern Banking 304

Case Study: Housing Boom and Bust 312

Chapter 11 Financial Markets 3161 Savings and Investment 318

2 Investing in a Market Economy 324

3 Buying and Selling Stocks 330

4 Bonds and Other Financial Instruments 338

Case Study: High Finance Goes Awry 344

Contents vii


UNIT 5 Measuring and Monitoring Economic Performance

Chapter 12 Economic Indicators and Measurements 348

1 Gross Domestic Product and Other Indicators 350

2 Business Cycles 358

3 Stimulating Economic Growth 368

Case Study: Poland: Economic Freedom and Economic Growth 376

Chapter 13 Facing Economic Challenges 3801 Unemployment in Today’s Economy 382

2 Poverty and Income Distribution 388

3 Causes and Consequences of Inflation 396

Case Study: The Effects of Inflation in the 1970s 404


UNIT 6 The Role of Government in the Economy

Chapter 14 Government Revenue and Spending 408

1 How Taxes Work 410

2 Federal Taxes 420

3 Federal Government Spending 428

4 State and Local Taxes and Spending 434

Case Study: Should Online Sales Be Taxed? 440

Chapter 15 Using Fiscal Policy 4441 What Is Fiscal Policy? 446

2 Demand-Side and Supply-Side Policies 454

3 Deficits and the National Debt 462

Case Study: Is the Federal Deficit Too Large? 468

Chapter 16 The Federal Reserve and Monetary Policy 472

1 The Federal Reserve System 474

2 Functions of the Federal Reserve 480

3 Monetary Policy 490

4 Applying Monetary and Fiscal Policy 498

Case Study: Interpreting Signals from the Fed 504

UNIT 7 The Global Economy

Chapter 17 International Trade 5081 Benefits and Issues of International Trade 510

2 Trade Barriers 520

3 Measuring the Value of Trade 526

4 Modern International Institutions 532

Case Study: Analyzing Tariffs—Who Wins and Who Loses? 538

Chapter 18 Issues of Economic Development 542

1 Definitions of Development 544

2 A Framework for Economic Development Objectives 552

3 Transition to a Market Economy 562

Case Study: China’s Campaign for Economic Power 570

Consumer and Personal Finance1 Budgeting and Money Management

1.1 Budgeting 574

1.2 Checking Accounts 576

1.3 Saving and Investing 578

2 Credit2.1 Types of Credit 582

2.2 Credit Reports 586

2.3 Identity Theft 588

3 Wise Choices for Consumers3.1 Buying a Car 590

3.2 Financing Your Education 592

3.3 Getting Insurance 596

3.4 Contracts: Reading the Fine Print 598

4 Getting Out on Your Own4.1 Getting a Job 600

4.2 Paying Taxes 604

4.3 Finding an Apartment 608

Reference SectionMath Handbook R1

Economics Skillbuilder Handbook R12

Glossary R32

Glossary in Spanish R45

Index R61

Acknowledgments R79

Chapter 1Computer Ownership in the United States 5Foreign Aid 25Adam Smith 30Case Study: The Real Cost of Expanding O’Hare Airport 32

Chapter 2Issues in a Market Economy 39Karl Marx 44Developing Market Economies in Eastern Europe 54Global Partnerships 62Case Study: Contrasting Economies:

North Korea and South Korea 64

Chapter 3New Business Firms and Business Firm Closures 71Milton Friedman 76Government Workers and Government Consumption 81Case Study: The United States: Land of Entrepreneurs 92

Chapter 4Demand for CDs and DVDs 99Vera Wang 104Changing Consumer Tastes 111Factors Affecting Elasticity 119Case Study: Fueling Automobile Demand 124

Chapter 5Farmers’ Markets 131Robert Johnson 152Case Study: Robots—Technology Increases Supply 158

Chapter 6Market Equilibrium 165Michael Dell 178Minimum Wage 182Case Study: Prices for Concert Tickets 186

Chapter 7Perfect Competition 193Monopolies 203Monopolistic Competition 207Oligopolies 210Joan Robinson 212Unfair Business Practices 216Case Study: Competition in Gadgets and Gizmos 220

Chapter 8Sole Proprietorships 227Mary Kay Inc. 230Partnerships 234Corporations 240Bill Gates and Microsoft 246Case Study: Apple: The Evolution of One Company 252

Chapter 9Demand and Supply of Labor 259Gary Becker 264U.S. Work Force 267Labor Unions 278Case Study: Managing Change in Your Work Life 282

Chapter 10The Functions of Money 289Measures of the Money Supply 294Alexander Hamilton 297U.S. Financial Institutions 301Case Study: Housing Boom and Bust 312

Chapter 11Saving 318Investing 325Mellody Hobson 326Stocks in the Dow Jones Industrial Average 334Case Study: High Finance Goes Awry 344

Chapter 12U.S. GDP 351Factors Affecting the Business Cycle 362U.S. Real GDP Per Capita 369Thomas Robert Malthus 374Case Study: Poland: Economic Freedom

and Economic Growth 376

Chapter 13U.S. Unemployment Rate 383U.S. Poverty Rate 389Hernando de Soto 394U.S. Consumer Price Index 397Case Study: The Effects of Inflation in the 1970s 404

Chapter 14Taxation 411Tax Schedules 422Maya MacGuineas 426Social Security 429State Sales Taxes 434Case Study: Should Online Sales Be Taxed? 440

Chapter 15Automatic Stabilizers 447John Maynard Keynes 456National Debt 465Case Study: Is The Federal Deficit Too Large? 468

Chapter 16Duties of the Fed 475Fed’s Role in the Sale of Government Securities 482Alan Greenspan 494Case Study: Interpreting Signals from the Fed 504


Economics Updates For current economic data and news, go to ClassZone.com

viii Economics Update

Economics For interactive graphs and lessons, go to ClassZone.com

YOUR ECONOMIC CHOICES

Graphing the Production Possibilities Curve 19What We Learn From PPCs 20Changing Production Possibilities 22Types of Graphs 26The Circular Flow Model 53Government in the Circular Flow Model 80Demand Schedules 100Demand Curves 102Changes in Quantity Demanded 108Change in Demand 109Elasticity of Demand 118Supply Schedules 132Supply Curves 134

Changes in Quantity Supplied 147Changes in Supply 148Elasticity of Supply 155The Interaction of Supply and Demand 165Equilibrium Price in Real Life 169Business Consolidation 243Equilibrium Wages 259Fractional Reserve Banking 305Aggregate Supply and Demand 360Shifting Tax Incidence 415Effects of Fiscal Policy 449Short-Term Effects of Monetary Policy 495The Effects of International Trade 517

Economics Updates (continued)

Chapter 17Costa Rica’s Economy 511David Ricardo 512U.S. Imports 518U.S. Balance of Trade 530Case Study: Analyzing Tariffs—Who Wins and Who Loses? 538

Chapter 18Health Statistics in LDCs 545Women in the Workplace in LDCs 556

Anne Krueger 560China’s Special Economic Zones 567Case Study: China’s Campaign For Economic Power 570

Consumer and Personal FinanceIdentity Theft 588Cost of Higher Education 593

Making Choices 13Marginal Benefits and Costs 16Competition 50Free Enterprise 75Public vs. Private 86Normal Goods and Inferior Goods 110Substitute Services 112Necessity or Choice 117Proportion of Income 119

Elasticity of Supply 156Prices and Consumers 177Government Monopoly 202Franchises 249Telecommuting 270Credit Card vs. Debit Card 309Investment Objectives 325Risk and Return 328Inflation and Purchases 401

Discretionary Spending 430Demand-Side Policies vs. Supply-Side Policies 460Rational Expectations Theory 501Specialization 511Strong Dollar and Weak Dollar 528


Economics SkillbuildersAnalyzing Cause and Effect 10Comparing and Contrasting Economic Systems 56Interpreting Graphs: Public Opinion Polls 82Analyzing Political Cartoons 114Evaluating Sources 144Interpreting Graphs: Shifting Curves 172Creating and Interpreting Economic Models 196Distinguishing Fact from Opinion 236

Drawing Conclusions from Graphs 272Interpreting Graphs: Online Financial Information 342Synthesizing Economic Data 356Using the Internet for Research 418Comparing the Treasury and the Fed 488Using a Decision-Making Process 568

Global PerspectivesSocial Spending in Sweden 90The NBA Goes International 136OPEC: Controlling the Oil Pipelines 200General Electric: Multinational Corporation 245The Euro as a Common Currency 292Stock Exchanges Around the World 336

Do Natural Resources Guarantee Wealth? 370Offshore Outsourcing: Scourge or Boon? 385Comparing Central Banks 478Economic Success with Few Natural Resources 515Non-Economic Trade Barriers 524Botswana’s Growing Economy 550

Economics PacesettersAdam Smith: Founder of Modern Economics 30Karl Marx: Economic Revolutionary 44Milton Friedman: Promoter of Free Markets 76Vera Wang: Designer in Demand 104Robert Johnson: Supplying African-American Entertainment 152Michael Dell: Using Price to Beat the Competition 178Joan Robinson: Challenging Established Ideas 212Mary Kay Ash: Going It Alone 230Bill Gates: Entrepreneur and Corporate Leader 246Gary Becker: The Importance of Human Capital 264

Alexander Hamilton: Shaping a Banking System 297Mellody Hobson: Investing in the Future 326Thomas Robert Malthus: The Population Problem 374Hernando de Soto: Another Path Out of Poverty 394Maya MacGuineas: Reforming the Tax System 426John Maynard Keynes: Architect of Demand-Side Policy 456Alan Greenspan: The Oracle of the Fed 494David Ricardo: The Theory of Comparative Advantage 512Anne Krueger: Reforming Development Policies 560

Math ChallengesCalculating Percentages 60Calculating the Elasticity of Demand 121Calculating Annual Wages 263Calculating Interest 321Understanding Nominal and Real GDP 353Calculating the Rate of Inflation 398Understanding a Progressive Tax 413Spending Multiplier Effect 455Deposit Expansion Multiplier 485Calculating Exchange Rates 527

x Special Features

Graphs, Charts, Tables, and MapsChapter 1

1.1 Factors of Production 91.2 Max’s Decision-Making Grid 151.3 Production Possibilities Table 191.4 Production Possibilities Curve 191.5 PPC: Guns vs. Butter 201.6 Shift in the PPC 221.7 Development Assistance 251.8 PCs per 100 People in the United States 261.9 World Internet Use by Economic Development 261.10 Household Internet Use in the United States 261.11 The Two Branches of Economics 281.12 Education and Earnings 34

Chapter 22.1 Comparing Economic Systems 432.2 North Korea: Economic Growth 452.3 Fundamentals of a Market Economy 512.4 The Circular Flow Model 532.5 Calculating Percentages 602.6 The World Student 622.7 North and South Korea: GDP per Capita 652.8 Growth and Productivity 66

Chapter 33.1 New Firms and Firm Closures 713.2 Free Enterprise and Legal Rights 743.3 Sales of Selected Food Products 793.4 Government in the Circular Flow Model 803.5 Workers on the Government Payroll 813.6 Government Consumption 813.7 Sulfur Dioxide Emissions 873.8 Public Transfer Payments 893.9 Social Spending 903.10 Average Tax Rates 903.11 Self-Employed Workers by Industry 93

Chapter 44.1 Law of Demand 994.2 Cheryl’s DVD Demand Schedule 1004.3 DVD Market Demand Schedule 1014.4 Cheryl’s DVD Demand Curve 1024.5 DVD Market Demand Curve 1034.6 Diminishing Marginal Utility 1074.7 Change in Quantity Demanded 1084.8 Decrease in Demand 1094.9 Increase in Demand 1094.10 Montclair’s Population During Tourist Season 1114.11 Change in Pizza Market Demand Curve 1114.12 Factors That Cause a Change in Demand 113

4.13 Elastic Demand Curve 1184.14 Inelastic Demand Curve 1184.15 Estimating Elasticity 1204.16 Calculating the Elasticity of Demand 121 4.17 Movie Ticket Revenue Table 1224.18 Personal Spending on Computers

and Stationery 126

Chapter 55.1 Law of Supply 1315.2 The Smiths’ Tomato Supply Schedule 1325.3 Tomato Market Supply Schedule 1335.4 The Smiths’ Tomato Supply Curve 1345.5 Tomato Market Supply Curve 1355.6 International Players in the NBA 1365.7 Janine’s Marginal Product Schedule 1395.8 Janine’s Production Costs Schedule 1415.9 Janine’s Production Costs

and Revenues Schedule 1435.10 Changes in Quantity Supplied 1475.11 Decrease in Supply 1485.12 Increase in Supply 1485.13 Number of Producers 1505.14 Factors That Cause a Change in Supply 1515.15 Elastic Supply Curve 1555.16 Inelastic Supply Curve 1555.17 U.S. Prices of Crude Oil and Gasoline 160

Chapter 66.1 Karen’s Market Demand and Supply Schedule 1656.2 Market Demand and Supply Curves 1666.3 Surplus, Shortage, and Equilibrium 1676.4 Decrease in Demand 1696.5 Increase in Demand 1696.6 Decrease in Supply 1706.7 Increase in Supply 1706.8 Equilibrium Price and Changes in

Demand and Supply 1716.9 Shifts in Supply of Sandwiches 1726.10 Characteristics of the

Price System in a Market Economy 1756.11 CD Prices and Producers 1766.12 Rent Control in Santa Monica 1816.13 Minimum Wage as a Price Floor 1826.14 Rationed Goods During World War II 1836.15 Concert Ticket Prices 1876.16 VCR Sales to Dealers 188

Graphs, Charts, Tables, and Maps xi


Graphs, Charts, Tables, and Maps(continued)Chapter 7

7.1 Characteristics of Perfect Competition 1947.2 Characteristics of a Monopoly 1997.3 OPEC Members 2007.4 OPEC Member Nations 2007.5 Comparing Market Structures 2117.6 Federal Consumer Protection Agencies 2177.7 Sales Concentration in Retail Trade 222

Chapter 88.1 Sole Proprietorships By Revenues 2298.2 Partnerships By Revenues 2348.3 Starts and Closures of Small Employer Firms 2368.4 Corporate Structure 2398.5 Corporations by Revenues 2408.6 Business Organizations: Advantages

and Disadvantages 2428.7 Types of Mergers 2438.8 General Electric 2458.9 World’s Leading Franchises 2488.10 Mergers in the United States 255

Chapter 99.1 Demand Curve 2599.2 Supply Curve 2599.3 Equilibrium Wage 2609.4 Median Earnings by Education 2619.5 Number of Workers by Education 2619.6 Calculating Annual Wages 2639.7 Number of Men and Women

in the Labor Force 2679.8 Percentage of Men and Women

in the Labor Force 2679.9 Employment in 1950 2689.10 Employment in 2000 2689.11 Fastest Growing Occupations in the

United States, 2004–2014 2729.12 Fastest Growing Occupations in the

United States, 2004–2014 2729.13 History of the American Labor Movement 276–2779.14 Union Membership in the United States 2789.15 Right-to-Work States Map 2799.16 Union and Nonunion Wages 284

Chapter 1010.1 Functions of Money 28910.2 Components of the U.S. Money Supply 29410.3 Major Developments in

American Banking 298–299

10.4 Banking Institutions in the United States 302

10.5 Fractional Reserve Banking 30510.6 Major Bank Mergers, 1991–2004 30610.7 Percentage of Households Using

Electronic Banking 314

Chapter 11 11.1 The Financial System 31911.2 Calculating Interest 32111.3 The Relationship of Risk and Return 32711.4 Common Stock and Preferred Stock 33111.5 Some NASDAQ Stocks 33311.6 Dow Jones Industrial Average, 1988–2008 33411.7 The Dow’s Best and Worst Years 33411.8 The 30 Stocks in the DJIA 33511.9 Leading World Stock Markets 33611.10 Average Bond Yields, 1988–2008 33911.11 Bond Ratings 34011.12 Savings Rates in Different Countries 346

Chapter 12

12.1 Components of U.S. Gross Domestic Product 35112.2 U.S. Nominal and Real Gross

Domestic Product 35212.3 Understanding Nominal and Real GDP 35312.4 National Income Accounting 35512.5 Components of U.S. GDP (In Billions of Dollars) 35612.6 The Business Cycle 35912.7 Aggregate Demand 36012.8 Aggregate Supply 36012.9 Change in Aggregate Demand 36112.10 Change in Aggregate Supply 36112.11 U.S. Leading Economic Indicators and Real GDP 36412.12 U. S. Business Cycles 36612.13 U.S. Real GDP Per Capita 36912.14 Oil Production and Consumption 37012.15 U.S. Private Business Multifactor Productivity 37312.16 Malthus’s Population Problem 37412.17 Underground Economies in Selected Countries 37812.18 Percent Change in Real GDP

from Preceding Period 379

Chapter 1313.1 U.S. Unemployment Rate 38313.2 Unemployment Rates by Age 38613.3 Unemployment Rates by Race 38613.4 U.S. Poverty Rate, 1959–2004 38913.5 Income Distribution in the United States 39113.6 Percent of Population in Poverty 39513.7 U.S. Consumer Price Index 39713.8 Calculating the Rate of Inflation 398

xii Graphs, Charts, Tables, and Maps

13.7 U.S. Consumer Price Index 39713.8 Calculating the Rate of Inflation 39813.9 Demand-Pull Inflation 39913.10 Wage-Price Spiral 40013.11 Layoffs and Outsourcing 406

Chapter 1414.1 Understanding a Progressive Tax 41314.2 Three Types of Tax Structures 41414.3 Elastic Demand and Taxes 41514.4 Inelastic Demand and Taxes 41514.5 The Effect of Cigarette Taxes on Quantity Demanded 41714.6 Selected Itemized Deductions on Individual Income Tax Returns 42114.7 Corporate Income Tax Receipts, 1950–2009 42414.8 Sources of Federal Tax Revenue 42514.9 The Federal Budget 43114.10 Comparing State Taxes 43514.11 Sources of State and Local Government Revenue 43714.12 U.S. Online Purchases 44114.13 State and Local Taxes For a Family of Four 442

Chapter 15

15.1 Effects of Expansionary Fiscal Policy 44915.2 Effects of Contractionary Fiscal Policy 44915.3 Effects of Fiscal Policy on the Economy 45015.4 Fiscal Policy and the Business Cycle 45115.5 Spending Multiplier Effect 45515.6 Supply-Side and Demand-Side Economics 45815.7 The Laffer Curve 45915.8 Budget Deficits and Surpluses 46315.9 Creditors of the Federal Government 46415.10 Actions to Control Deficits and Debt 46615.11 Government Debt as a Percentage of GDP 470

Chapter 16

16.1 Structure of the Fed 47616.2 Federal Reserve Districts 47716.3 The Federal Reserve and Check Clearing 48116.4 A Federal Reserve Note 48316.5 The Fed Creates Money 48416.6 Deposit Expansion Multiplier 48516.7 Demand For Money 48716.8 Tools of Monetary Policy 49116.9 Approaches to Monetary Policy 49316.10 Monetary Expansion 49516.11 Monetary Contraction 49516.12 Effects of Expansionary Policies 49916.13 Effects of Contractionary Policies 50016.14 Effects of Conflicting Policies 50216.15 Short-Term Interest Rates 506

Chapter 1717.1 Specialization and Trade 51417.2 Plecona’s Motorbike Export Market 51717.3 Plecona’s Microwave Oven Import Market 51717.4 U.S. International Trade in Goods by Category 51817.5 Tariff Rates Are Falling 52117.6 The Effect of an Import Tariff on Price 52217.7 Calculating Exchange Rates 52717.8 The Strong Dollar and U.S. Trade 52817.9 Balance of U.S. Trade with China 52917.10 U.S. Balance of Trade 53017.11 NAFTA’s First Ten Years 53317.12 Some Regional Trade Groups 53417.13 U.S. and World Raw Sugar Prices 53917.14 U.S. Trade with Regional Groups 54017.15 Imports and Exports for Selected Regions 541

Chapter 1818.1 World Per Capita GDPs 54618.2 Ownership of Typical Consumer Goods 548–54918.3 Rates of Primary School Completion and Secondary School Enrollment 55318.4 Corruption and Per Capita GDP 55718.5 USAID Allocations by Region 55918.6 Poland’s Inflation Rate After Shock Therapy 56318.7 Annual Economic Growth Rate, China and Selected Developed Nations 56718.8 Life Expectancy in World Regions 572

Consumer and Personal FinanceCPF1 Creating a Budget 575CPF2 Writing a Check 576CPF3 Government–Insured Accounts 578CPF4 Risk and Return 579CPF5 Investment Options 580CPF6 The Power of Compounding 581CPF7 Building Wealth Over Time 581CPF8 Costs of Borrowing $10,000 583CPF9 Understanding Your Credit Card Statement 585CPF10 How Does Your Credit History Rate? 587CPF11 Buying a Car 591CPF12 Financial Aid Options 593CPF13 Types of Insurance 597CPF14 A Cell Phone Contract 599CPF15 Writing a Resumé 601CPF16 References 602CPF17 The W-4 Form 604CPF18 Filling Out the 1040EZ 606CPF19 Looking for an Apartment 609

Graphs, Charts, Tables, and Maps xiii

A1

CONTENTS

United States Maps

U.S.: Political . . . . . . . . . . . . . . A2–A3

U.S.: Natural Resources . . . . . . . . A4

U.S.: Land Use . . . . . . . . . . . . . . . . A4

U.S.: Population Density . . . . . . . A5

U.S.: Median Household Income . . . . . . . . . . . . . . . . . . . . . . A5

World Maps

World: Political . . . . . . . . . . . A6–A7

World: Natural Resources . . . . . . A8

World: Land Use . . . . . . . . . . . . . . A9

World: Population Density . . . . A10

World: Gross Domestic Product Per Capita . . . . . . . . . . . . . . . . . . . A11

Data on the U.S. Economy

EAS 1 U.S. GDP by Industry pie graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . A12

EAS 2 U.S. Employment by Industry pie graphs . . . . . . . . . . . . . . . . . . . A12

EAS 3 U.S. Employment: Number of People line graph. . . . . . . . . . . . . A13

EAS 4 U.S. Employment: Percent of Population line graph . . . . . . . . . A13

EAS 5 Key U.S. Interest Rates line graph . . . . . . . . . . . . . . . . . . . . . . . . . A14

EAS 6 U.S. National Debt as Percent of GDP bar graph . . . . . . . . . . . . . A14

Data on the World Economy

EAS 7 World Data File table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A15

China, India, United States, Indonesia, Brazil, Pakistan, Bangladesh, Russia, Nigeria, Japan, Mexico, Philippines, Vietnam, Germany, Egypt, Ethiopia, Turkey, Iran, Thailand, France

EAS 8 World Population line graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A16

EAS 9 Population Pyramids bar graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . A16

China, India, United States, Brazil, Russia, Nigeria

A2 Economic Atlas and Statistics

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Lake Tahoe

PyramidLake

GooseLake

GreatSalt

Lake

LakePowell

FlatheadLake

LakeOahe

LakeFrancis

Case

FortPeckLake

YellowstoneLake

LakeTexoma

Arkansas

Brazos

M A N I T O B A

S A S K A T C H E W A N

B R I T I S H C O L U M B I A

A L B E R T A

W A S H I N G T O N

I D A H O

W Y O M I N G

O R E G O N

M O N T A N A

C A L I F O R N I A

N E V A D A

U T A H

A R I Z O N A

K A N S A S

C O L O R A D O

O K L A H ON E W M E X I C O

N E B R A S K A

N O R T H D A K O T A

S O U T H D A K O T A

T E X A S

P A C I F I C O C E A N M E X I C O

C A

LakeManitoba

Pierre

Cheyenne

Bismarck

Helena

Boise

Olympia

Salem

Carson City

Santa Fe

Lincoln

Austin

OklahomaCity

SacramentoSalt LakeCity

Phoenix

Denver

Spokane

Tacoma

Amarillo

Lubbock

Pueblo

Stockton

Wichita Falls

San Bernardino

Eugene

Laredo

Waco

Reno

Billings

Laramie

Gillette

Rock Springs

Durango

Alamogordo

YakimaCoeurd'Alene

Winnemucca

Elko

Bozeman

Scottsbluff

Dodge City

Ely

CedarCity

Aberdeen

Bellingham

Fargo

Grand Forks

Great FallsLewiston

MinotMissoula

Bakersfield

Midland

Boulder

Brownsville

Casper

Clovis

Enid

Eureka

Flagstaff

GrandIsland

Grand Junction

McAllen

Hutchinson

North Platte

Lawton

Logan

Medford

ModestoMonterey

Nampa

Odessa

Ogden

Pocatello

Provo

RapidCity

Roswell

Salina

Santa Barbara

Santa Rosa

Sioux Falls

Stillwater

Yuma

San Angelo

Las Cruces

Twin Falls

Fort Collins

Idaho Falls

Del Rio

Farmington

Trinidad

Butte

Miles City

St. George

Moab

Nogales

KlamathFalls

Bend

Corvallis

Kennewick

Killeen

Abilene

Lake HavasuCity

Ventura

San Luis Obispo

Chico

Redding

Manhattan

Havre

Winnipeg

Albuquerque

El Paso

Long Beach

Oakland

Tucson

Wichita

Fort Worth

SanJose

Colorado Springs

CorpusChristi

Chihuahua

Fresno

Las Vegas

Riverside

Los Angeles

San Diego

Dallas

San Antonio

CiudadJuárez

Tijuana

SanFrancisco

Portland

Seattle

125˚ 120˚ 115˚ 110˚

50˚

105˚ 100˚

100˚105˚110˚115˚

45˚

35˚

30˚

40˚

25˚

125˚

120˚

Yu k

on

Yukon

Mackenzie

Kusk

okwim

Dat

e Li

ne

Internatio

nal

G u l f o f A l a s k a

BristolBay

A l a s k aP e n i n

s u l a

NunivakIsland

SaintLawrenceIsland

KodiakIsland

P A C I F I C O C E A N

B e r i n gS e a

BeaufortARCT ICOCEANSea

A L A S K AY U K ON

B . C .

T E R R I T OR Y

N O R TH WEST

T E R R I T ORY

RUSS IA

C A N A D A

Juneau

Barrow

FairbanksNome

Kenai

Bethel Anchorage

170˚ 160˚ 150˚ 140˚ 130˚70˚

65˚

60˚

150˚160˚

130˚170˚60˚

55˚

© Rand McNally & Co.Made in U.S.A.

Hawai‘i

Maui

O‘ahuMoloka‘i

Kaua‘i

L˚na‘i

HAWAIIHonolulu

155˚

160˚

20˚


0 100 200 mi

0 150 300 km

0 100 200 mi

0 150 300 km

PACIF ICOCEAN

U.S

. Po

liti

cal

Map


Isle Royale

A T L A N T I C

O C E A N

G U L F O F M E X I C O

GeorgianBay

Gulf of

Maine

Red

Arkansas

Missouri

Wab

ash

Ohi

o

Oh

io

Cumberland

Savannah

Roanoke

Toledo BendRes.

SamRayburn

Res.

KentuckyLake

Lake Huron

Lake Ontario

Lake

Champlain

Lake

Okeechobee

Mis

siss

ipp

i

Mis

siss

ippi

La

ke

Mi c

hi g

an

Ch

attahoo

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esse

e

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son

L a k eS u p e r i o r

Missouri

Lake Erie

Lake of theWoods

O N T A R I O

Q U É B E C

N E W

B R U N S W I C K

MI C

H

I GA

N

M A

M I N N E S O T A

I O W A

W I S C O N S I N

A R K A N S A S

L O U I S I A N A

MISSISSIPPI

M I S S O U R I

A L A B A M A

T E N N E S S E E

G E O R G I A

K E N T U C K Y

F L O R I D A

N O RT H C A R O L I N A

S O U T H

C A R O L I N A

I L L I N O I S

I N D I A N A O H I O

P E N N S Y L V A N I A

V I R G I N I A

N E W Y O R K

WESTVIRGINIA

DELAWARE

MARYLAND

NEW JERSEY

CONN.R.I.

MASSACHUSETTS

VERMONT

NEW

HAMPSHIRE

M A I N E

Long Island

N A D A

B A H A M A S

Chesapeake

Bay

LakeNipigon

LakeWinnipeg

St. L

awre

nce

Augusta

Montpelier

Concord

Hartford

Trenton

Albany

Harrisburg

Annapolis

Dover

Charleston

Columbia

Tallahassee

Montgomery

Frankfort

Springfield

LansingMadison

Des Moines

JeffersonCity

Topeka

Little Rock

Jackson

BatonRouge

Greenville

Nashville

IndianapolisColumbus

St. Paul

Raleigh

Richmond

Providence

Atlanta

Boston

Nassau

Ottawa

WashingtonD.C.

Duluth

Allentown

Beaumont

New Haven

Chattanooga

Columbus

Davenport

Dayton

DaytonaBeach

Evansville

Flint

Gary

Huntsville

Knoxville

Macon

Moline

Peoria

Racine

SavannahShreveport

Springfield

St. Petersburg

SyracuseWorcester

YoungstownSouthBend

FortLauderdale

Fort Wayne

Winston-Salem

CedarRapids

Rockford

Mobile

Norfolk

TraverseCity

Marquette

Sioux City

St. Cloud

Albany

Appleton

Asheville

Huntington

Athens

Augusta

Bangor

Biloxi

Binghamton

Bloomington

Burlington

Charleston

Clarksville

Columbia

Muncie

Aurora

Decatur

Dothan

Dubuque

Eau Claire

Erie

Fayetteville

FortSmith

Gainesville

Galveston

Greenville

Hattiesburg

Johnson City

Jonesboro

Kalamazoo

Lakeland

Lima

Springfield

Mankato

Monroe

Muskogee

Owensboro

Pensacola

Portland

Roanoke

RochesterSaginaw

Scranton

Sheboygan

St. Joseph Terre Haute

Texarkana Tuscaloosa

Watertown

West Palm Beach

Wilmington

Wilmington

Lafayette

Waterloo

GreenBay

Pine Bluff

Fort Myers

CapeGirardeau

Manchester

KeyWest

Newport News

Akron

Sault Ste. Marie

Bloomington

InternationalFalls

Emporia

Tyler

Lake Charles

Ann Arbor

Oshkosh

KansasCity

Hilton Head Island

Joplin Hopkinsville

Parkersburg

Fayetteville

Lynchburg

Atlantic City

Wausau

Springfield

Lewiston

Presque Isle

Omaha

Tulsa

Baltimore

Birmingham

Charlotte

Cincinnati

Jacksonville

KansasCity Louisville

Memphis

Milwaukee

NewOrleans

ToledoNewark

Buffalo

Virginia Beach

Orlando

Lexington

Greensboro

GrandRapids

Rochester

Montréal

Toronto

ChicagoNew York

Philadelphia

Houston

Miami

Tampa

St. Louis

Pittsburgh

Cleveland

Minneapolis

Detroit

90˚95˚ 80˚85˚ 70˚75˚ 65˚

45˚

40˚

35˚

30˚

25˚

75˚80˚85˚90˚95˚

70˚

Nationalcapitals

Statecapitals Towns Population

Over 1,000,000

250,000 – 1,000,000

Under 250,000

International boundary

State boundary

0 100 200 300 Miles

0 100 200 300 400 Kilometers

United States: Political

N-MDO24000-P1-1-1-1-1



© Rand McNally & Co.

Gulf of Mexico

PacificOcean

Atlantic

Ocean

Dallas

Houston

Los Angeles

San Francisco

Seattle

DenverKansas City

Minneapolis

Chicago

Detroit

Washington D.C.

New York

Boston

Atlanta

Miami

St. Louis

PacificOcean

Anchorage

Arctic Circle

PacificOcean

Honolulu

United States:Natural Resources

CoalCopperIron oreLeadNatural gasPetroleumZinc

N-MDL24000-M1-1-1-1-1

United States:Land UseAgricultureFishingForestryHunting,forestry,subsistencefarmingLittle or noactivityManufacturing,commerceNomadicherdingStock raising

U.S

. N

atu

ral

Reso

urc

es

U.S

. La

nd

Use


Entire United States: $41,994

��

United States:Median Household

IncomeOver $45,000$40,000 – $45,000$35,000 – $40,000$30,000 – $35,000$25,000 – $30,000Under $25,000

Source: U.S. Census Bureau, 2000 data

United States:Population DensityPeople per sq. mile(People per sq. km)

Over 1,250 (Over 500)

250 – 1,250 (100 – 500)

62.5 – 250 (25 – 100)

25 – 62.5 (10 – 25)

2.5 – 25 (1 – 10)

Under 2.5 (Under 1)




AT

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World: Land U

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(Peo

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Percentag

e of W

orld

Pop

ulatio

n in

each Per C

apita G

DP C

atego

ry

World: G

rossD

omestic Product

Per Capita2002 per capita

estimate in U.S. dollars

Over $20,000

$10,000 – $20,000$5,000 – $10,000$2,500 – $5,000$1,000 – $2,500U

nd

er $1,000D

ata no

t available

d

N

Sou

rce: CIA

Wo

rld Factb

oo

k, 2003G

oo

de’s In

terrup

ted H

om

olo

sine Pro

jection

(Co

nd

ensed

)


FIGURE EAS 1 U.S. GROSS DOMESTIC PRODUCT BY INDUSTRY

Source: U.S. Bureau of Economic Analysis

Manufacturing

Transportation and public utilitiesAgriculture, forestry, and fishing

Mining

Construction Retail trade

Finance, insurance, and real estate

Wholesale trade

Services

Government

1950 1970 1990 2005

2.6%

8.8%

27.0%11.4%

14.4%

10.8%

6.3%

6.8%

4.4%

7.5%

1.4%

8.0%

22.7%

14.7%

18.2%

15.2%

6.5%

2.6%4.8%

5.9%

1.5%

6.9%

16.2%

17.9%

26.3%

13.8%

6.0%

1.7%4.3%

5.4%

1.7%

6.6%

12.0%

20.5%

30.3%

12.4%

5.9%

1.0%4.8%

4.8%

FIGURE EAS 2 U.S. EMPLOYMENT BY INDUSTRY

Source: U.S. Bureau of Economic Analysis

Manufacturing

Transportation and public utilitiesAgriculture, forestry, and fishing

Mining

Construction Retail trade

Finance, insurance, and real estate

Wholesale trade

Services

Government

1.5%

14.0%

25.3%3.3%

13.9%

14.1%

4.7%

10.9%

5.5%

6.8%

1950

0.7%

14.7%

22.8%

4.6%

18.3%

19.6%

5.0%

3.9%5.0%

5.4%

1970

0.6%

16.9%

15.3%

5.9%

26.4%

17.0%

5.2%

2.6%5.3%

4.8%

1990

0.4%

11.1%

9.7%

6.0%

41.6%

16.0%

4.0%

1.6%

6.1%

3.5%

2005


Not in labor force

Employed

Unemployed

FIGURE EAS 4 U.S. EMPLOYMENT:PERCENT OF POPULATION

Perc

ent

of

civi

lian

no

n-i

nst

itu

tio

nal

po

pu

lati

on

20

30

10

40

50

60

70

1955

1965

1975

1985

1995

2005

1950

1960

1970

1980

1990

2000

Year

Source: U.S. Bureau of Labor Statistics

Not in labor force

Employed

Unemployed

FIGURE EAS 3 U.S. EMPLOYMENT:NUMBER OF PEOPLE

Nu

mb

er o

f p

eop

le

(mill

ion

s)

25

50

75

100

125

150

1955

1965

1975

1985

1995

2005

1950

1960

1970

1980

1990

2000

Year

Source: U.S. Bureau of Labor Statistics


FIGURE EAS 5 KEY U.S. INTEREST RATES

Prime rate

Federal funds rate

10-year Treasury bond

30-year mortgage

Source: U.S. Federal Reserve Bank Year19

5519

6519

7519

8519

9520

0519

5019

6019

7019

8019

9020

00

Inte

rest

rat

e

6

8

2

4

10

12

14

16

18

20

0

10

20

30

40

50

60

70

80

90

100

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Perc

ent

of

GD

P

Year

FIGURE EAS 6 U.S. NATIONAL DEBT AS PERCENT OF GDP

Sources: U.S. Bureau of the Public Debt, U.S. Bureau of Economic Analysis


FIG

UR

EE

AS

7W

orld

Data File

Co

un

tryPo

pu

lation

Percent

urb

an / ru

ralU

nem

plo

ymen

trate

GD

P (in b

illion

so

f U.S. d

ollars)

GD

P per cap

ita(in

U.S. d

ollars)

National debt (as

percent of G

DP)

Inflatio

n rate

China

1,303,701,00

037 / 63

9.02,234.1

1,70924.4

1.8

India1,103,596,0

00

28 / 728.9

772.0705

53.84.0

United States

296,483,0

00

79 / 215.1

12,455.842,0

00

64.7

3.4

Indonesia221,932,0

00

42 / 5811.8

281.31,283

49.910.5

Brazil18

4,184,0

00

81 / 199.8

795.74,320

51.66.9

Pakistan162,420,0

00

34 / 666.6

111.0728

53.89.3

Bangladesh14

4,233,00

023 / 77

2.560.8

400

44.5

7.0

Russia143,025,0

00

73 / 277.6

763.35,349

12.912.6

Nigeria

131,530,00

04

4 / 562.9

99.1678

11.017.9

Japan127,728,0

00

79 / 214.4

4,567.435,757

158.0–0.6

Mexico

107,029,00

075 / 25

3.6768.4

7,29817.4

4.0

Philippines8

4,765,00

04

8 / 528.7

98.41,168

72.37.6

Vietnam

83,305,00

026 / 74

2.451.4

6184

8.28.2

Germ

any82,490,0

00

88 / 1211.7

2,791.733,854

67.32.0

Egypt74,033,0

00

43 / 579.5

89.51,265

104.7

11.4

Ethiopia77,431,0

00

15 / 85no data

11.2153

no data6.8

Turkey72,907,0

00

65 / 3510.2

362.55,062

68.08.2

Iran69,515,0

00

67 / 3311.2

192.32,767

28.912.1

Thailand65,0

02,00

031 / 69

1.8173.1

2,65947.6

4.5

France60,742,0

00

76 / 249.9

2,126.733,918

66.21.9

Sources: International Monetary Fund, Population Reference Bureau,

U.S. C

entral Intelligence Agency; data from

2005 and earlier

FIGURE EAS 9 POPULATION PYRAMIDS

Male

Female

China

Percent of total population

Ag

e in

yea

rs

4 2 0 2 4

75-7970-7465-6960-6455-59

45-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

50-54

80+

United States


Ag

e in

yea

rs

4 2 0 2 4

75-7970-7465-6960-6455-59

45-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

50-54

80+

NigeriaRussia


Ag

e in

yea

rs

75-7970-7465-6960-6455-59

45-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

50-54

80+

India


Ag

e in

yea

rs

75-7970-7465-6960-6455-59

45-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

50-54

80+

6 4 2 0 2 4 6

Brazil


75-7970-7465-6960-6455-59

45-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

50-54

80+

6 4 2 0 2 4 6 6 84 2 0 2 48 6


Ag

e in

yea

rs

4 2 0 2 4

75-7970-7465-6960-6455-59

45-4940-4435-3930-3425-2920-2415-1910-14

5-90-4

50-54

80+

Ag

e in

yea

rs

Source: U.S. Census Bureau, 2000 data

FIGURE EAS 8 WORLD POPULATION

2

3

1

4

5

6

7

1910

1930

1950

1970

1990

1900

1920

1940

1960

1980

2000

Year

Source: United Nations

Pop

ula

tio

n (

in b

illio

ns)


S1

ST

RA

TE

GIE

S F

OR

TA

KIN

G

STA

ND

AR

DIZ

ED

TE

ST

S

STRATEGIES FOR TAKING STANDARDIZED TESTSThis section of the textbook helps you develop and practice the skills you need to study economics and to take standardized tests. Part 1, Strategies for Studying Economics, takes you through the features of the textbook and offers suggestions on how to use these features to improve your reading and study skills. Part 2, Test-Taking Strategies and Practice, offers specific strategies for tackling many of the items you will find on a standardized test. It gives tips for answering multiple-choice and extended-response questions. In addition, it offers guidelines for analyzing charts and line, bar, and pie graphs that often accompany these questions. Each strategy is followed by a set of questions you can use for practice.

CONTENTS for Strategies for Taking Standardized Tests

Part 1: Strategies for Studying Economics . . . . . . . S2

Part 2: Test-Taking Strategies and Practice

Multiple Choice . . . . . . . . . . . . . . . . . . . . . . . . S6

Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S8

Line Graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . S10

Bar and Pie Graphs . . . . . . . . . . . . . . . . . . . . . . S12

Extended Response. . . . . . . . . . . . . . . . . . . . . . S14

S2

CONCEPT REVIEW

Microeconomics is the study of the economic behaviors anddecisions of small units, such as individuals and businesses.

CHAPTER 4 KEY CONCEPT

Demand is the willingness to buy a good or service and the abilityto pay for it.

WHY THE CONCEPT MATTERS

The concept of demand is demonstrated every time you buysomething. List the last five goods or services that you purchased.Rate each one with a number from 1 (not important to you) to 4(very important). Which of the goods or services would you stopbuying if the price rose sharply? Describe the relationship betweenyour ratings and your willingness to buy at a higher price.

CHAPTER

What caused more people to demandhybrid cars? See the Case Study onpages 124–125.

96 97Demand

4

Demand

This computer storecustomer meets thetwo requirements ofdemand—the customeris willing to buy and isable to pay.

Go to ECONOMICS UPDATE for chapterupdates and current news on demandin the automobile industry. (See CaseStudy, pages 124–125.)

Go to INTERACTIVE REVIEW forconcept review and activities.

Demand

Go to ANIMATED ECONOMICS forinteractive lessons on the graphsand tables in this chapter.

More at ClassZone.com

SECTION 1What Is

Demand?

SECTION 2What Factors

Affect Demand?

SECTION 3What Is Elasticity

of Demand?

CASE STUDYFueling

AutomobileDemand

Microeconomics

Unit 2Market Economies at Work

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Part 1: Strategies for Studying Economics

Reading is the central skill in the effective study of economics or any othersubject. You can improve your reading skills by using helpful techniques andby practicing. The better your reading skills, the more you will understand whatyou read. Below you will find several strategies that involve built-in featuresof Economics: Choices and Concepts. Careful use of these strategies will help youlearn and understand economics more effectively.

Preview Chapters Before You Read

Each chapter begins with a two-page chapter opener. Study these pages to help you get ready to read.

1 Read the chapter title and section titles for clues to what will be covered in the chapter.

2 Read the Concept Review, which reviews previous learning important to understanding chaptercontent. Then study the Key Concept, which focuses on the main idea explored in the chapter.Finally, read the Why the Concept Matters explanation and question. These help place the chapter’smain idea in a real-world context.

3 Study the chapter-opening photograph and caption. These provide a visual illustration of thechapter’s main idea.

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SECT ION

1

Find an update on the de-mand for CDs and DVDsat ClassZone.com

98 Chapter 4 99Demand

OBJECT IVES KEY TERMS TAKING NOTES

In Section 1, you will

• define demand and outlinewhat the law of demand says

• explain how to interpret andcreate demand schedules anddescribe the role of marketresearch in this process

• explain how to interpret andcreate demand curves

demand, p. 98

law of demand, p. 99

demand schedule, p. 100

market demand schedule, p. 100

demand curve, p. 102

market demand curve, p. 102

As you read Section 1, completea cluster diagram like this one foreach key concept. Use the GraphicOrganizer at Interactive Review@ ClassZone.com

What Is Demand?

The Law of Demand

KEY CONCEPTS

In Chapter 3, you learned that the United States has a free enterprise economy. Thistype of economic system depends on cooperation between producers and consumers.To make a profit, producers provide products at the highest possible price. Consumersserve their own interests by purchasing the best products at the lowest possible price.The forces of supply and demand establish the price that best serves both producersand consumers. In this chapter, you’ll learn about the demand side of this equation.

Demand is the desire to havesome good or service and the abil-ity to pay for it. You may want totake a round-the-world cruise orto rent a huge apartment that over-looks the ocean. Or you may wantto buy a brand-new sports car ora state-of-the-art home entertain-ment center. However, you may notbe able to afford any of these things.Therefore, economists would saythat you have no actual demand forthem. Even though you want them,you don’t have the money neededto buy them. Conversely, you maywant the latest CDs by several ofyour favorite bands. And, at a price

of between $12 and $15 each, you can afford them. Since you have both the desire forthem and the ability to pay for them, you do have demand for CDs.

Price is one of the major factors that influence demand. The law of demand

states that when the price of a good or service falls, consumers buy more of it. Asthe price of a good or service increases, consumers usually buy less of it. In otherwords, quantity demanded and price have an inverse, or opposite, relationship. Thisrelationship is graphically illustrated in Figure 4.1 below.

EXAMPLE Price and Demand

Let’s take a look at an example of demand in action. Cheryl, a senior at MontclairHigh School, loves movies and enjoys collecting them on DVD. She and Malik, afriend from school, sometimes meet downtown at Montclair Video Mart to lookthrough the DVD stacks. Rafael, the owner of the video mart, often jokes that Cheryland Malik spend so much time at his store that he might have to give them jobs.Actually, Cheryl already has a job—stocking shelves at her neighborhood supermar-ket. She worked so many hours this summer that she has extra money to spend. Let’ssee how DVD prices at Montclair Video Mart affect her spending decisions.

Cheryl has been saving to buy the DVD boxed set of the original Star Wars tril-ogy, one of her favorite series of movies. The set costs $69.95, and Cheryl has themoney to buy it this weekend. When Cheryl goes to the Montclair Video Mart, sheis disappointed to learn that the Star Wars set is sold out and a new shipment won’tarrive for a week. She decides to buy some other DVDs so that she won’t go homeempty-handed, but she also decides to save roughly half of her money toward afuture purchase of Star Wars.

As she looks through the movie DVDs, she sees that most of those she wants sellfor $15. How many will she buy at that price? Let’s say she decides to buy three andkeep the rest of her money for the Star Wars trilogy. But what if each of the DVDsshe wants costs just $5? Cheryl might decide that the price is such a good deal thatshe can buy seven. As you can see, the law of demand is more than just an economicconcept. It’s also a description of how consumers behave.

APPLICATION Applying Economic Concepts

A. You have $50 and want to buy some CDs. If prices of CDs rose from $5 each to $10,how would your quantity demanded of CDs change?

Demand is the willing-ness to buy a good orservice and the ability topay for it.

QUICK REFERENCE

NEED HELP?

Law of demandstates that when pricesgo down, quantitydemanded increases.When prices go up,quantity demandeddecreases.

QUICK REFERENCE

Demand

KEY TERMS

demand, p. 98

law of demand, p. 99

demand schedule, p.

market demand sched

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Preview Sections Before You Read

Each chapter consists of three or four sections. These sections explain and build on the Key Concept. Usethe section openers to help you prepare to read.

1 Study the information under Objectives. This bulleted list tells you the key points discussed in thematerial you are about to read.

2 Preview the Key Terms list. This list identifies the vocabulary you will need to learn in order tounderstand the material you are about to read. Use the Taking Notes graphic to help you organizeinformation presented in the text.

3 Notice the structure of the section. Blue heads label the major topics; red subheads signal smallertopics within a major topic or illustrative examples of the major topic. Together, these heads provideyou with a quick outline of the section.

4 Read the first paragraph under Key Concepts. This links the content of the section to previouschapters or sections.

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Use Active Reading Strategies As You Read

Now you are ready to read the chapter. Read one section at a time, from beginning to end.

1 Read to build your economic vocabulary. Use the marginal Quick Reference notes to reinforce yourunderstanding of key economic terms.

2 Use special features and illustrations to reinforce and extend your understanding of content andto apply your knowledge. Study features such as Your Economic Choices, which applies economicconcepts to a real-world situation. Look closely at the figures, which illustrate economic concepts intable, chart, or graph form. Answer the accompanying Analyze questions to test your understandingof the visual and the concept it illustrates.

3 At natural breaks in the section, ask yourself questions about what you have just read. Look forAPPLICATION headings at the bottom of pages and answer the questions or complete the activities.These provide you with opportunities to apply the knowledge you have gained from your reading.

YOUR ECONOMIC CHOICES

?

117Demand

Economists use the term elasticity of demand to describe how responsive con-sumers are to price changes in the marketplace. Economists describe demand as being either elastic or inelastic. Demand is elastic when a change in price, either up or down, leads to a relatively larger change in the quantity demanded. The more responsive to change the market is, the more likely the demand is elastic. On the other hand, demand is inelastic when a change in price leads to a relatively smaller change in the quantity demanded. For this reason, elastic goods and services are often said to be price sensitive. So, in the case of inelastic demand, changes in price have little impact on the quantity demanded.

Another way to think about elasticity is to imagine that a rubber band represents quantity demanded. When the quantity demanded increases by a marked amount, the demand is elastic and the rubber band stretches. If the quantity demanded barely changes, demand is inelastic and the rubber band stretches very little.

EXAMPLE Elasticity of Demand for Goods and Services

Let’s look at an example of elastic demand. Suppose that a certain brand of PDAs goes on sale. If the price of that brand goes down 20 percent, and the quantity demanded goes up 30 percent, then demand is elastic. The percentage change in quantity demanded is greater than the percentage change in price. Goods that have a large number of substitutes fall into the elastic category, since if the prices change, consumers can choose other products.

Now think about a completely different type of good—the medicine insulin. Many diabetics require daily insulin injections to regulate their blood sugar levels. Even if the price of insulin were to rise sharply, diabetics would still need the same amount of insulin as they did before. If the price were to drop, they would not need any more insulin than their required dosage. As a result, the demand for insulin is inelastic because the quantity demanded remains relatively constant.

▲ Cosmetic whitening

▲ Filling a cavity

NECESSITY OR CHOICE

Which of these services could you give up?Most people consider getting a cavity fi lled to be a necessity. Having your teeth whitened is a service that can be postponed or eliminated without harm. As a result, the demand for whitening is more elastic than the demand for fi llings.

Elasticity of demandis a measure of how responsive consumers are to price changes.

Demand is elastic if quantity demanded changes signifi cantly as price changes.

Demand is inelastic if quantity demanded changes little as price changes.

QUICK REFERENCE

118 Chapter 4

Over time the elasticity of demand for a particular product may change. If moresubstitutes for a product become available, the demand may become more elastic.For example, the cost of cell phones and their service has become more elastic asmore providers enter the market. On the other hand, in the case of prescriptiondrugs, if a product is withdrawn from the market and there are fewer choices for theconsumer, the demand may become inelastic.

The data for elastic demand and the data for inelastic demand produce demandcurves that look very different from each other. Compare Figure 4.13 and Figure4.14 below. Notice that the inelastic demand curve has a steeper slope than the elas-tic demand curve does. The reason for this difference is that the changes along thevertical axis (the price) are proportionally greater than the changes along the hori-zontal axis (the quantity demanded).

Demand is said to be unit elastic when the percentage change in price and quan-tity demanded are the same. In other words, a 10 percent increase in price would causeexactly a 10 percent drop in quantity demanded, while the reverse would be true.

No good or service is ever really unit elastic. Instead, unit elasticity is simply thedividing point between elastic and inelastic demand. It is a useful concept for figur-ing out whether demand is elastic or inelastic.

APPLICATION Drawing Conclusions

A. Decide how elastic demand is for the following item. Explain your reasoning.

When a grocery store sells soup at $1.09 per can, it sells 1,500 cans per week. Whenit dropped the price to $0.75, it sold an additional 1,000 cans.

Demand is unit elasticwhen the percentagechange in price andquantity demanded arethe same.

QUICK REFERENCE

0

4

6

8

10

12

4,000 8,000 12,000 16,000 20,000 0

40

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160

200

20 40 60 80 100 120

2 20

FIGURE 4.13 ELASTIC DEMAND CURVE FIGURE 4.14 INELASTIC DEMAND CURVE

Quantity demanded of movie tickets

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Quantity demanded of fillings

b

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a In Figure 4.13, elasticdemand curves havegradual slopes. Theyare more horizontalthan vertical because ofthe greater changes inquantity demanded.

b In Figure 4.14, inelasticdemand curves havesteep slopes. Theyare more vertical thanhorizontal becausequantity demandedchanges very little.

ANALYZE GRAPHS1. In Figure 4.13, what happens to the quantity demanded

when price drops from $10 to $8?

2. In Figure 4.14, what is the difference in quantity demandedbetween the most expensive and least expensive filling?

Use elastic and inelastic demandcurves at ClassZone.com

Elasticity of demandis a measure of howresponsive consumers areto price changes.

QUICK REFERENCE

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STRATEGIES

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Review and Summarize What You Have Read

When you finish reading a section, review and summarize what you’ve read. If necessary, go back andreread information that was not clear the first time through.

1 Look again at the blue heads and red heads for a quick summary of the major points covered inthe section.

2 Study any tables, charts, graphs, and photographs in the section. These visual materials often conveyeconomic information in condensed form.

3 Complete all the questions in the Section Assessment. This will help you think critically about thematerial you have just read.

ClassZone.com

122 Chapter 4 123Demand

ECONOMICS IN PR ACTICE

SECTION 3 AssessmentREVIEWING KEY CONC EPTS

Calculating ElasticityDetermine the elasticity of bottledwater by calculating elasticity andusing the revenue table below. Usethe information on pages 121 and122 to help you.

Write a Summary After you havedetermined whether bottled wateris elastic or inelastic, think aboutwhat factors affect the demand forbottled water. Write a summary ofyour conclusions explaining whetherdemand is elastic or inelastic andwhy, and what factors affect theelasticity of water.

Challenge What effect might theintroduction of a new energy drinkhave on the demand for bottledwater? Use economic thinking tosupport your answer.

Total Revenue Test

KEY CONCEPTS

Businesses need to know about elasticity of demand because it influences the amountof revenue they will earn. Economists measure elasticity of demand by calculating aseller’s total revenue, the amount of money a company receives for selling its prod-ucts. Total revenue is calculated using the following formula, in which P is the priceand Q is the quantity sold: TOTAL REVENUE = P Q.

You can measure elasticity by comparing the total revenue a business would receivewhen offering its product at various prices. This method is the total revenue test.

If total revenue increases after the price of a product drops, then demand forthat product is considered elastic. Why? Because even though the seller makes lesson each unit sold, the quantity demanded has increased enough to make up for thelower price. For example, if a hot dog stand sells 100 hot dogs for $2.50 each, the totalrevenue is $250 for the day. However, if the price of hot dogs drops to $2.00 each and150 are sold, the total revenue for the day will be $300. The demand is elastic.

But if the total revenue decreases after the price is lowered, demand is consideredinelastic. If the hot dog stand lowers its price to $1.00 each and sells 200 hot dogs, itmakes $200 in total revenue. Clearly, the price reduction has caused only a modestincrease in quantities sold, which is not enough to compensate for lower revenues.

EXAMPLE Revenue Table

Let’s look at an example of demand for movie tickets. In Figure 4.17, you can seehow total revenues show whether demand is elastic or inelastic.

APPLICATION Creating Tables

D. Use the information from Figure 4.14 to estimate prices to make a total revenue table.

Total revenue is acompany’s income fromselling its products.

Total revenue test isa method of measuringelasticity by comparingtotal revenues.

QUICK REFERENCE

a At $10 a ticket, thequantity demanded is2,000. Total revenue is$20,000.

b When the price dropsto $8, the quantitydemanded rises to6,000. Total revenuerises to $48,000. So,demand is elastic.

ANALYZE TABLESWhen the price range changes from $8 to $6, is demand elastic or inelastic? Explain.

Price of aMovie

Ticket ($)

QuantityDemandedper Month

TotalRevenue ($)

12 1,000 12,000

10 2,000 20,000

8 6,000 48,000

6 12,000 72,000

4 20,000 80,000

b

a

1. Use each of the terms below in a sentence that givesan example of the term:

2. How is total revenue related to elasticity of demand?

3. Why are elastic goods and services said to be price sensitive?

4. What are the factors that affect elasticity of demand andhow does each affect elasticity?

5. Analyze the factors that determine elasticity to explain why utilitiescompanies never offer sale prices on their services.

6. Using Your Notes How does the conceptof unit elasticity relate to the concepts ofelasticity and inelasticity? Refer to yourcompleted cluster diagram.

Use the Graphic Organizer at InteractiveReview @ ClassZone.com

a. elastic b. inelastic c. total revenue

7. Analyzing Causes In early 2004, news articles reported thatprescription drug prices were rising almost three times faster thanthe prices of other products. Identify the factors that explain whythe drug companies were able to raise prices so sharply.

8. Analyzing Data In June, Snead’s Snack Bar sold 1,000 fruitsmoothies at a price of $2.50 each. In July, they sold 1,300 fruitsmoothies at a price of $2.00. Is the demand for fruit smoothieselastic or inelastic? Use the formula on page 121 to decide. Showthe math calculations to support your answer.

9. Applying Economic Concepts Suppose the company thatruns concession stands at a local sports arena wants to increaserevenue on sales of soft drinks. The manager believes the onlysolution is to charge higher prices. As a business consultant, whatadvice would you give the manager? Use economic thinking tosupport your answer.

10. Challenge You learned in this section that no product ever hasdemand that is unit elastic. What possible reasons can you givefor that? Draw on what you know about utility, demand, andelasticity as you formulate your answer.

C RIT IC AL THINKING Number ofBottles Sold Price ($)

35 2.00

75 1.50

100 1.25

120 1.00

elasticityof demand

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STRATEGIES

Part 2: Test-Taking Strategies and Practice

You can improve your test-taking skills by practicing the strategies discussed inthis section. First, read the tips on the left-hand page. Then apply them to thepractice items on the right-hand page.

Multiple Choice

1 Read the stem carefullyand try to answer thequestion or complete thesentence before looking atthe alternatives.

2 Look for key words andfacts in a question. Theymay direct you to thecorrect answer.

3 Read each alternativewith the stem. Don’t makeyour final decision onthe correct answer untilyou have read all of thealternatives.

4 Eliminate alternatives thatyou know are wrong.

5 Look for modifiers to helpyou rule out incorrectalternatives.

6 Carefully considerquestions that includeall of the above as analternative.

7 Take great care withquestions that are statednegatively.

1. The country with the most elements of acommand economy is

A. China

B. North Korea

C. South Korea

D. Japan

2. Economic models

A. all present statistical information

B. represent economic forces

C. must be three-dimensional

D. always use graphs to convey information

3. Which of these statements about Adam Smith is correct?

A. He is considered to be the founder of modern economics.

B. He was an economic advisor at the Versailles peace conference.

C. He endorsed the trickle-down theory of economics.

D. All of the above.

4. Which of the following is not a factor of production?

A. land

B. labor

C. services

D. capital

stem

alternatives

Absolute words, such asall, always, never, ever,and only often signal anincorrect alternative.

If you select this answer,be sure that all of thealternatives are correct.

You can eliminate D ifyou remember that Japanhas a market economy.

Eliminate incorrectalternatives by identifyingthose that are factors ofproduction.

Most is a key word. Chinahas some elements of acommand economy butNorth Korea has more.

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answers: 1 (B), 2 (B), 3 (D), 4 (C)

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PRACTICE

Directions: Read each question carefully and choose the best answer from the four alternatives.

1. Which of the following is not a type of business consolidation?

A. vertical merger

B. franchise

C. conglomerate

D. multinational corporation

2. Wage rates are influenced by

A. supply and demand

B. discrimination

C. government actions

D. all of the above

3. As of 2005, the euro had been adopted by

A. the United Kingdom

B. all the European countries

C. some European countries

D. every member of the European Union

4. The central bank of the United States

A. has no cash reserves

B. is the U.S. Treasury

C. does not lend money

D. was established by the Federal Reserve Act

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answers: 1 (A), 2 (D)

STRATEGIES

Charts

Charts present informationin a visual form. Economicstextbooks use several types ofcharts, including tables, flowcharts, Venn diagrams, circularflow charts, and infographics.The chart most commonly foundin standardized tests, however,is the table. This organizes infor-mation in columns and rows foreasy viewing.

1 Read the title and identifythe broad subject of thechart.

2 Read the column and rowheadings and any otherlabels. These will providemore details about thesubject of the chart.

3 Note how the informationin the chart is organized.

4 Compare and contrast theinformation from columnto column and row to row.

5 Try to draw conclusionsfrom the information inthe chart.

6 Read the questions andthen study the chart again.

1. The country that had the greatest percentage change in GDPin 2003 was

A. the United States

B. the United Kingdom

C. Japan

D. Canada

2. In 2002, which country experienced a decline in GDP?

A. France

B. Italy

C. Germany

D. Japan

This chart organizes the countriesalphabetically. In some charts, informa-tion is organized according to years orthe value of the numbers displayed.

Gross Domestic Product (GDP)—Percentage ChangeOver Previous Year—for Selected Countries

Country 2002 2003

Canada 3.4 2.0

France 1.1 0.5

Germany 0.1 -0.1

Italy 0.4 0.3

Japan -0.3 2.5

United Kingdom 1.8 2.2

United States 1.9 3.0

Source: Historical Statistics of the United States

Notice that the rowscontain both positiveand negative numbers.

Think about whattrend or trends thedata indicates.

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PRACTICE

Directions: Use the chart and your knowledge of economics to answer questions 1 through 4.

1. Which country produced themost refined copper in the yearsshown?

A. Canada

B. Mexico

C. the United States

D. Chile

2. From 1986 to 1988, Mexico’scopper production

A. remained fairly constant

B. nearly doubled

C. decreased slightly

D. almost tripled

3. Which North American countryshowed an increase in copperproduction each year from 1987through 1995?

A. Canada

B. Mexico

C. the United States

D. all of the above

4. Brazil’s copper production wasgreatest in

A. 1995

B. 1994

C. 1990

D. 1989

Refined Copper Production for Selected Countries (in thousands of metric tons)

Year

North America South America

Canada Mexico UnitedStates

Brazil Chile Peru

1986 493.4 72.3 1,479.9 166.0 783.7 225.6

1987 491.1 128.4 1,541.6 201.7 795.0 224.8

1988 528.7 140.9 1,852.0 185.9 852.9 174.7

1989 515.2 155.8 1,953.8 207.8 1,071.0 224.3

1990 515.8 157.1 2,017.4 201.7 990.8 181.8

1991 538.0 190.1 2,000.0 141.4 1,012.8 244.1

1992 539.3 191.0 2,140.0 158.0 1,242.3 251.1

1993 561.6 197.8 2,250.0 161.1 1,093.2 261.7

1994 527.5 199.5 2,230.0 170.0 1,080.0 253.0

1995 560.0 207.5 2,280.0 165.0 1,288.8 282.0

Source: 2003 Industrial Commodity Statistics Yearbook, United Nations

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STRATEGIES

Line Graphs

Line graphs display informa-tion in a visual form. They areparticularly useful for showingchanges and trends over time.

1 Read the title of the graphto learn what it is about.

2 Study the labels on thevertical and horizontalaxes to see the kinds ofinformation presented inthe graph. The verticalaxis usually shows what isbeing graphed, while thehorizontal axis indicatesthe time period covered.

3 Review the information inthe graph and note anytrends or patterns. Lookfor explanations for thesetrends or patterns.

4 Carefully read andanswer the questions.Note if questions referto a specific year or timeperiod, or if they focus ontrends or explanations fortrends.

Nuclear Generation of Electricity in the United States

Source: U.S. Energy Information Administration

1. Nuclear generation of electricity first exceeded 80percent of maximum capacity in

A. 1994

B. 1995

C. 1998

D. 1999

2. During which time period did the percentage ofmaximum capacity increase the most?

A. 1989–1991

B. 1993–1995

C. 1997–1999

D. 1999–2002

One likely explanationfor increase in electricitygenerated is an increasein demand.

answers: 1 (B), 2 (C)

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PRACTICE

Directions: Use the graph and your knowledge of economics to answer questions 1 through 4.

1. During which period did theprice of regular gasoline risetoward its peak?

A. May–August 2004

B. November 2004–February 2005

C. August–November 2005

D. February–April 2006

2. Which of the followingstatements most accuratelydescribes the information shownin the graph?

A. Gas prices were stable during both 12-

month periods.

B. There was a severe spike in price during

each 12-month period.

C. The price of gas was always higher in

2005–2006.

D. The price of regular gas fluctuated more

during 2004–2005.

3. During which period was theprice of gasoline lowest?

A. in December 2004

B. in December 2005

C. in May 2004

D. in May 2005

4. In 2005–2006, the price ofgasoline per gallon

A. nearly reached $3.00

B. dropped from close to $3.00 to less than

$2.20

C. fluctuated more than in 2004–2005

D. all of the above

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May

June July

Aug

Sept Oct

Nov Dec Jan

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200

250

300

350

Retail Prices for Regular Gasoline

2005–06

2004–05

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STRATEGIES

Bar and Pie Graphs

A bar graph allows for compari-sons among numbers or sets ofnumbers. A pie, or circle, graphshows relationships among theparts of a whole. These partslook like slices of a pie. The sizeof each slice is proportional tothe percentage of the wholethat it represents.

1 Read the title of the graphto learn what it is about.

2 For a bar graph, studythe labels on the verticaland horizontal axes to seethe kinds of informationpresented in the graph.Note the intervals betweenamounts or years.

3 Study the legend, ifthere is one. The legendon a bar graph providesinformation on what isbeing graphed. The legendon a pie graph showswhat each slice of the pierepresents.

4 Look at the source lineand evaluate the reliabilityof the information in thegraph.

5 Study the data on thegraph. Make comparisonsamong the slices of a piegraph. Draw conclusions andmake inferences based onthe data.

6 Read the questionscarefully and use anywords to reject incorrectalternatives.

U.S. Imports of Crude Oil and Petroleum Productsby Region


1. Which region of the United States imported themost crude oil per day during 2004?

A. East Coast

B. West Coast

C. Gulf Coast

D. Midwest

Components of M1

2. What is the largest component of M1?

A. currency

B. demand deposits

C. other checkable deposits

D. traveler’s checks

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East

Coast

Mid

west

Gulf Coas

t

Rockies

Wes

t Coas

t

Mill

ion

s o

f b

arre

ls p

er d

ay

Region

Crude oil

Petroleum products

Currency

Demand Deposits

Other CheckableDeposits

Traveler’s Checks

54%

23%

22%

1%

Source: Federal Reserve Statistical Release H.6, July 6, 2006

Statistics from govern-ment agencies, suchas the Federal Reserve,tend to be reliable.

The graph shows thatcurrency—paper moneyand coins—makes upmore than half of M1.

answers: 1 (C), 2 (A)

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S13

PRACTICE

Directions: Use the graphs and your knowledge of economics to answer questions 1 through 4.

1. When was the greatest number ofjobs added to the economy?

A. July 2005

B. November 2005

C. February 2006

D. March 2006

2. Which statement is supported byinformation in the graph?

A. The graph shows that there were greater

fluctuations in job creation in the later

months of 2005 than there were in the

early months of 2006.

B. More jobs were added to the economy in

all of 2005 than in all of 2006.

C. The graph shows a steady upward trend in

the number of jobs added to the economy.

D. More jobs were added to the economy

between January and June of 2006 than

between June and December of 2005.

3. Which source of fuel generatednearly half of all electric power?

A. coal

B. natural gas

C. nuclear

D. petroleum

4. Which single source generatedthe least amount of electricity?

A. coal

B. natural gas

C. nuclear

D. petroleum

50

0

100

150

200

250

300

350

400

Jun–0

5

Jul–0

5

Aug–05

Sep–0

5

Oct–05

Nov–05

Dec–0

5

Jan–0

6

Feb–0

6

Mar

–06

Apr–06

May

–06

Jun–0

6

Nu

mb

er o

f Jo

bs

(in

th

ou

san

ds)

Month and Year

New Jobs Added to the U.S. Economy

Source: U.S. Department of Labor

Coal

Nuclear

Natural Gas

Hydroelectricity

Petroleum

Other

Electricity Generation by Energy Source

49%19%

19%

7%

3% 3%

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Source: Energy Information Administration,Electric Power Monthly, June 2006

S14

STRATEGIES

Extended Response

Extended-response questionsusually focus on an exhibit ofsome kind—a chart, graph, ordiagram, for example. They aremore complex than multiple-choice questions and oftenrequire a written response. Some extended-responsequestions ask you to completethe exhibit. Others require youto present the information inthe exhibit in a different form.Still others ask you to write anessay, a report, or some otherextended piece of writing. Inmost standardized tests, exhib-its have only one extended-response question.

1 Read the title of theexhibit to get an idea ofthe subject.

2 Carefully read theextended-responsequestions. (Question 1 asksyou to complete the graphby drawing and labelinga new demand curve.Question 2 asks you towrite a brief explanationof what is shown in thecompleted graph.)

3 Study and analyze theexhibit.

4 If the question requires anextended piece of writing,jot down ideas in outlineform to get started.

Shifts in Demand

1. The graph above shows the demand for CDs. Howwould demand for CDs change if the price of CDplayers rose? Draw a new demand curve to reflectthis change. Label the new curve D2.

2. Write a brief explanation of why demand for CDschanged in this way.

Sample Response CDs and CD players are used together, so

they are complements. If demand for one changes, demand

for the other will change in the same way. If the price of

CD players rises, then demand for CD players and CDs will

decrease and the demand curve shifts to the left.

Pric

e

Quantity demanded

D1

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S15

PRACTICE

Directions: Use the graph and your knowledge of economics to answer questions 1 and 2.

1. The graph above shows an economy at its macroeconomic equilibrium. Copythis graph onto a separate sheet of paper. On the graph, chart how the aggregatesupply curve and macroeconomic equilibrium would change if interest rates went up.

2. Write a brief description of these changes and explain why they occurred.

AD1

Pric

e le

vel

Real GDPQ1

P1

AS1

Shifts in Aggregate Supply

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Documents

ECONOMICS - in Harcourt Publishing Company, Attn: ... Sally Meek has been teaching Economics, ... 1 Unemployment in Today’s Economy 382