Principles of Economics 3e

Citation

Greenlaw, S. A., Shapiro, D., & MacDonald, D. (2022). Principles of Economics (3rd ed.). OpenStax, Rice University. Free official edition: https://openstax.org/details/books/principles-economics-3e

Chapter Summary

The book has 34 chapters, which the preface arranges into eight parts running from microeconomics to macroeconomics. Closely related chapters are grouped below, with each chapter's exact title kept.

Chapters 1–2: Welcome to Economics! / Choice in a World of Scarcity

The opening part defines economics as the study of decisions under scarcity, explains the division of labour and specialisation, separates microeconomics from macroeconomics, introduces the circular flow diagram and compares traditional, command and market economies; it also introduces the FRED database used throughout. Chapter 2 builds the first tools: budget constraints, opportunity cost, marginal analysis and sunk costs, then the production possibilities frontier with productive and allocative efficiency and comparative advantage, ending with the difference between positive and normative statements.

Chapters 3–4: Demand and Supply / Labor and Financial Markets

Chapter 3 introduces demand and supply schedules and curves, the factors that shift each curve, a "four-step process" for analysing a change in equilibrium, price ceilings and floors, and consumer, producer and social surplus with deadweight loss. Chapter 4 shows the same model working in labour markets (including minimum and living wages) and financial markets (interest rates, usury laws), and argues that market prices carry information that price controls hide.

Chapters 5–6: Elasticity / Consumer Choices

Elasticity is defined and calculated (price elasticity of demand and supply, polar cases, constant unitary elasticity), then linked to revenue, short- and long-run adjustment and tax incidence, and extended to income, cross-price, labour supply and savings elasticities. Chapter 6 models consumer choice with total and marginal utility and the rule of equal marginal utility per dollar, separates income and substitution effects, and closes with a section on behavioural economics as an alternative framework; indifference curves are left to Appendix B.

Chapters 7–10: Production, Costs, and Industry Structure / Perfect Competition / Monopoly / Monopolistic Competition and Oligopoly

This block is the theory of the firm. Chapter 7 distinguishes explicit from implicit costs and accounting from economic profit, then derives short-run production and cost curves (fixed, variable, average and marginal costs) and long-run average cost with economies and diseconomies of scale. Chapter 8 analyses the price-taking firm, the shutdown and break-even points, entry and exit, and the efficiency of long-run equilibrium. Chapter 9 covers barriers to entry, natural and legal monopoly, intellectual property and the monopolist's MR = MC choice, and Chapter 10 treats monopolistic competition, oligopoly, cartels, the kinked demand curve and the prisoner's dilemma.

Chapters 11–13: Monopoly and Antitrust Policy / Environmental Protection and Negative Externalities / Positive Externalities and Public Goods

These chapters open the applied-policy part. Chapter 11 covers mergers, concentration ratios and the Herfindahl-Hirschman Index, restrictive practices such as tying and predatory pricing, cost-plus versus price-cap regulation of natural monopolies, and deregulation and regulatory capture. Chapter 12 compares command-and-control regulation with pollution charges, marketable permits and property rights, weighs the benefits and costs of US environmental law, and discusses international issues such as climate change and biodiversity. Chapter 13 explains why innovation has positive spillovers, reviews government tools to encourage it (direct R&D funding, tax incentives, intellectual property, university–industry links), and defines public goods and the free-rider problem.

Chapters 14–15: Labor Markets and Income / Poverty and Economic Inequality

Chapter 14 derives labour demand from the value of the marginal product, then covers monopsony, unions, bilateral monopoly, employment discrimination and the economics of immigration. Chapter 15 explains how the US poverty line is drawn, shows the "poverty trap" created when benefits phase out as earnings rise, describes safety-net programmes (TANF, SNAP, the EITC, Medicaid), measures inequality with quintiles and Lorenz curves, and discusses the trade-off between redistribution and incentives.

Chapters 16–18: Information, Risk, and Insurance / Financial Markets / Public Economy

Chapter 16 analyses imperfect and asymmetric information (the "lemons" problem and ways markets respond), insurance, moral hazard and adverse selection, set against the debate over the Affordable Care Act. Chapter 17 explains how firms raise financial capital through retained earnings, borrowing, bonds and stock, how households weigh return, risk and liquidity, and why diversification and early saving matter for personal wealth. Chapter 18 turns to public choice: rational ignorance, special interests, pork-barrel spending and logrolling, the median voter theory and voting cycles.

Chapters 19–22: The Macroeconomic Perspective / Economic Growth / Unemployment / Inflation

The macroeconomics half begins with measurement: GDP and its components, nominal versus real values, the business cycle, international comparisons and the limits of GDP as a welfare measure. Chapter 20 explains modern economic growth through labour productivity, the aggregate production function, capital deepening, technology, growth accounting and convergence. Chapter 21 defines and measures unemployment, describes its patterns, and separates cyclical unemployment (with theories of sticky wages) from frictional and structural unemployment and the natural rate. Chapter 22 covers price indices and their biases, the history of US and world inflation, who gains and loses from it, and indexing.

Chapter 23: The International Trade and Capital Flows

This chapter introduces the trade balance and current account, links trade deficits and surpluses to flows of financial capital, and develops the national saving and investment identity to explain what drives a country's trade balance, distinguishing the balance of trade from the level of trade.

Chapters 24–26: The Aggregate Demand/Aggregate Supply Model / The Keynesian Perspective / The Neoclassical Perspective

Chapter 24 contrasts Say's law and Keynes' law and builds the AD/AS model, showing how shifts in aggregate supply and demand produce growth, recession, inflation and stagflation, and identifying Keynesian, intermediate and neoclassical zones of the AS curve. Chapter 25 presents the Keynesian view — sticky wages and prices, coordination failures, menu costs, the expenditure multiplier and the Phillips curve — and Chapter 26 the neoclassical view of potential GDP, flexible prices, rational and adaptive expectations and a vertical long-run Phillips curve, before showing how the two perspectives can be combined. The expenditure-output (Keynesian cross) model appears in Appendix D.

Chapters 27–28: Money and Banking / Monetary Policy and Bank Regulation

Chapter 27 defines money by its functions, distinguishes commodity and fiat money and M1 from M2, uses T-account balance sheets to show how banks work, and derives the money multiplier in a limited-reserves setting. Chapter 28 describes the Federal Reserve, bank supervision, deposit insurance and the lender of last resort, contrasts traditional tools with policy in today's ample-reserves environment (including interest on reserves and quantitative easing), and discusses pitfalls such as the velocity of money and asset bubbles.

Chapters 29–31: Exchange Rates and International Capital Flows / Government Budgets and Fiscal Policy / The Impacts of Government Borrowing

Chapter 29 explains the foreign exchange market, what moves exchange rates over different time horizons (including purchasing power parity), their macroeconomic effects and the choice among floating rates, soft and hard pegs and merged currencies. Chapter 30 covers US government spending and taxation, deficits and debt, expansionary and contractionary fiscal policy, automatic stabilisers, policy lags and the balanced-budget debate. Chapter 31 returns to the saving–investment identity to examine twin deficits, Ricardian equivalence, crowding out and the role of public investment in growth.

Chapters 32–34: Macroeconomic Policy Around the World / International Trade / Globalization and Protectionism

The final part compares low-, middle- and high-income countries, their growth strategies (including the East Asian Tigers and debates over foreign aid), and the different nature of unemployment, inflation and trade concerns around the world. Chapter 33 develops absolute and comparative advantage, intra-industry trade and the gains from reducing trade barriers. Chapter 34 analyses tariffs, quotas and non-tariff barriers as an indirect subsidy from consumers to producers, the effects of trade on jobs and wages, the main arguments for restricting imports, and the WTO and regional agreements.

Key Concepts

Chapters 1–2: Welcome to Economics! / Choice in a World of Scarcity

• Scarcity: human wants for goods, services and resources exceed what is available, so every choice involves trade-offs.
• Opportunity cost: the value of the best alternative given up when making a choice.
• Production possibilities frontier: the combinations of goods an economy can produce with given resources; points on it are productively efficient.

Chapters 3–4: Demand and Supply / Labor and Financial Markets

• Equilibrium: the price at which quantity demanded equals quantity supplied; above it there is a surplus, below it a shortage.
• Price ceiling and price floor: legal maximum and minimum prices that, if binding, cause shortages or surpluses.
• Social surplus: the sum of consumer and producer surplus, which is largest at the competitive equilibrium.

Chapters 5–6: Elasticity / Consumer Choices

• Price elasticity of demand: the percentage change in quantity demanded divided by the percentage change in price.
• Tax incidence: how a tax burden is split between buyers and sellers, depending on relative elasticities.
• Marginal utility per dollar: the utility-maximising rule that the last dollar spent on each good should yield the same extra satisfaction.

Chapters 7–10: Production, Costs, and Industry Structure / Perfect Competition / Monopoly / Monopolistic Competition and Oligopoly

• Economic profit: revenue minus both explicit and implicit (opportunity) costs.
• Shutdown point: the minimum of average variable cost, below which a competitive firm should stop producing in the short run.
• Barriers to entry: legal, technological or market factors that keep competitors out and sustain monopoly.
• Prisoner's dilemma: a game showing why cartel members are tempted to cheat even though cooperation would benefit them all.

Chapters 11–13: Monopoly and Antitrust Policy / Environmental Protection and Negative Externalities / Positive Externalities and Public Goods

• Herfindahl-Hirschman Index: a measure of market concentration calculated by summing the squared market shares of all firms.
• Marketable permits: tradable rights to emit a set amount of pollution, an example of a market-oriented environmental tool.
• Public good: a good that is non-excludable and non-rival, which markets tend to under-provide because of free riders.

Chapters 14–15: Labor Markets and Income / Poverty and Economic Inequality

• Monopsony: a labour market with a single employer, which hires fewer workers at a lower wage than a competitive market.
• Poverty trap: the situation in which benefits fall so fast as earnings rise that working brings little gain.
• Lorenz curve: a graph comparing the cumulative share of income received with a perfectly equal distribution.

Chapters 16–18: Information, Risk, and Insurance / Financial Markets / Public Economy

• Adverse selection and moral hazard: problems in insurance markets arising from hidden information about risk and from reduced care once insured.
• Diversification: spreading investments across many assets to reduce risk.
• Rational ignorance: voters' choice not to become informed because a single vote is very unlikely to change an outcome.

Chapters 19–22: The Macroeconomic Perspective / Economic Growth / Unemployment / Inflation

• Real GDP: output measured at constant prices, using a price index such as the GDP deflator.
• Capital deepening: an increase in physical or human capital per worker, one source of productivity growth.
• Natural rate of unemployment: unemployment that persists even without a recession, made up of frictional and structural unemployment.
• Substitution and quality bias: reasons why a fixed-basket price index like the CPI tends to overstate inflation.

Chapter 23: The International Trade and Capital Flows

• Current account balance: the broad measure of a country's trade in goods and services plus income and transfers.
• National saving and investment identity: the condition that the supply of financial capital (private and public saving plus foreign inflows) equals the demand for it, which links budget and trade balances.

Chapters 24–26: The Aggregate Demand/Aggregate Supply Model / The Keynesian Perspective / The Neoclassical Perspective

• AD/AS model: a diagram of the price level and real GDP in which aggregate demand and aggregate supply determine equilibrium output and prices.
• Expenditure multiplier: the idea that a change in autonomous spending causes a more than proportionate change in GDP.
• Vertical long-run AS curve: the neoclassical view that, with flexible prices, output returns to potential GDP and demand only affects the price level.

Chapters 27–28: Money and Banking / Monetary Policy and Bank Regulation

• Functions of money: medium of exchange, unit of account, store of value and standard of deferred payment.
• Money multiplier: the amount of money the banking system can create from each dollar of reserves when reserves are limited.
• Quantitative easing: central bank purchases of long-term securities to lower long-term rates when short-term rates are near zero.

Chapters 29–31: Exchange Rates and International Capital Flows / Government Budgets and Fiscal Policy / The Impacts of Government Borrowing

• Purchasing power parity: the exchange rate at which tradable goods cost the same in different countries, towards which rates tend over long periods.
• Automatic stabilisers: taxes and spending that change with the economy and dampen fluctuations without new legislation.
• Ricardian equivalence: the theory that private saving rises to offset government borrowing, which the evidence supports only partially.

Chapters 32–34: Macroeconomic Policy Around the World / International Trade / Globalization and Protectionism

• Comparative advantage: the ability to produce a good at a lower opportunity cost than others, the source of gains from trade.
• Intra-industry trade: trade in similar products between similar economies, driven by specialisation and economies of scale.
• Protectionism: tariffs, quotas and non-tariff barriers that raise domestic prices, benefiting producers at consumers' expense.

Critical Analysis

Strengths

• Complete, conventional coverage in one free volume. The book follows the standard progression from microeconomics to macroeconomics and covers every topic a two-semester principles sequence normally needs, from elasticity and market structures to AD/AS, money, fiscal policy and trade. The preface also invites instructors to assign chapters and sections in whatever order suits their course.
• Consistent learning design. Every section opens with learning objectives and every chapter ends with key terms, a section-by-section summary, self-check questions, review questions, critical thinking questions and problems. "Work It Out" boxes walk through calculations step by step, and the "Bring It Home" case (such as Netflix's 2011 price change for elasticity or the East India Company for monopoly) frames each chapter and is resolved at its end.
• Data literacy. The book repeatedly uses the Federal Reserve's FRED database, and the third edition updated its data and refers frequently to the COVID-19 pandemic, so students practise reading real series for unemployment, inflation and GDP.
• Broader set of voices in the third edition. The preface lists added material on economists such as Esther Duflo, Elinor Ostrom, Mariana Mazzucato, William Darity Jr., Kate Raworth and W. Arthur Lewis, alongside views such as Thomas Sowell's on minimum wages, which helps students see that policy questions are debated.

Limitations

• Strongly US-centred. Institutions, data and policy examples are mostly American (the Federal Reserve, FDIC, TANF and SNAP, US environmental law, US budget politics), so students elsewhere need local equivalents.
• Light on formal tools. Indifference curves, present value and the Keynesian cross are confined to appendices, game theory is limited to the prisoner's dilemma in Chapter 10, and there is no calculus. This suits a first course but leaves more analytical courses to supply their own treatment.
• Macroeconomics framed by "perspectives". The AD/AS model is presented through Keynesian and neoclassical perspectives rather than a single integrated model with an explicit monetary policy rule, which some instructors may find dated compared with newer approaches.
• Answers mostly reserved for instructors. Only Self-Check answers are available to students; answers to review questions, critical thinking questions and problems are in an instructor guide.

Where It Fits in the Course

For the Principles of Economics course, this book and Mankiw's Principles of Economics are the conventional principles options; Mankiw is generally described as following the same broad sequence, and the OpenStax book offers that sequence free of charge. The Economy 2.0: Microeconomics from CORE Econ is the other free introductory text, but it is organised very differently, around institutions, power, incomplete contracts and social preferences, with supply and demand coming late. Students in a CORE-based course can use the OpenStax book as a reference for standard diagrams and definitions; students in a conventional course can use CORE's units to see how modern research changes the picture.

Sloman, Garratt and Guest's Economics is a natural step up for more depth across the same range of topics. The two upper-level microeconomics texts listed — Bowles's Microeconomics: Behavior, Institutions, and Evolution and Acemoglu and colleagues' Microeconomics — come after a principles course and assume more mathematics; this book's Chapters 5–10 and its appendices on indifference curves and present value are the minimum preparation for them.

How to Use This Book

The book is aimed at introductory college students and needs only basic algebra and graph reading; Appendix A reviews the mathematics used. It can serve a one-semester survey or a two-semester sequence: the preface's eight parts map neatly onto a micro course (Chapters 1–18) and a macro course (Chapters 1–3 and 19–34).

For a microeconomics course, treat Chapters 1–10 as core and choose among the policy chapters (11–18) according to interest; Chapter 6 is easier to follow alongside Appendix B on indifference curves if your course uses them. For macroeconomics, Chapters 19–22 and 24–30 form the core; Chapter 23 and Chapters 31–34 add open-economy and international material, and Appendix D on the expenditure-output model is worth reading with Chapter 25. Students who need trade theory in a micro course can move Chapters 33–34 earlier.

Work every "Work It Out" example with pen and paper, do the Self-Check questions at the end of each section (answers are in the book's answer key), and use the problems for practice. Follow the FRED links and recreate at least a few charts yourself; this is where the book's data emphasis pays off.

Edition and Sources

This guide is based on Principles of Economics 3e (third edition, OpenStax, published December 2022; the PDF read carries a 2026 Rice University notice and states that the original version was based on Timothy Taylor's Principles of Economics: Economics and the Economy, 2nd edition), downloaded from the official OpenStax page at https://openstax.org/details/books/principles-economics-3e. It draws on the preface, the full table of contents including the five appendices, and for all 34 chapters the "Bring It Home" introduction, every section heading with its learning objectives, the key terms and the full "Key Concepts and Summary", with the summary of Appendix A also read.