Principles of microeconomics 7e gottheil

Principles of

Microeconomics
Seventh Edition

Fred M. Gottheil
University of Illinois

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To my wife, Diane To my children, Lisa and Joshua, who grew up
together, not just as sister and brother, but as best friends.

Principles of Microeconomics, 7e
Fred M. Gottheil

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Brief Contents
PART 1 THE BASICS OF ECONOMIC ANALYSIS

1

...........................................................................................................................................................................................

1. INTRODUCTION
2. PRODUCTION POSSIBILITIES
AND OPPORTUNITY COSTS

2

3. DEMAND AND SUPPLY

52

27

PART 2 INTRODUCTION TO MICROECONOMICS

81

...........................................................................................................................................................................................

4. ELASTICITY
82
5. HAPPINESS, UTILITY, AND CONSUMER
CHOICE
108

6. PRICE CEILINGS AND PRICE FLOORS
7. ENTREPRENEURSHIP AND BUSINESS
OWNERSHIP

PART 3 THE MICROECONOMICS OF PRODUCT MARKETS

135
156

173

...........................................................................................................................................................................................

8. COSTS OF PRODUCTION
9. MAXIMIZING PROFIT
10. IDENTIFYING MARKETS AND
MARKET STRUCTURES
11. PRICE AND OUTPUT IN MONOPOLY,
MONOPOLISTIC COMPETITION, AND

PERFECT COMPETITION

175
203
223

12. PRICE AND OUTPUT DETERMINATION
UNDER OLIGOPOLY
275
13. ANTITRUST AND REGULATION
303
14. EXTERNALITIES, MARKET FAILURE,
AND PUBLIC CHOICE
331

249

PART 4 THE MICROECONOMICS OF FACTOR MARKETS

355

...........................................................................................................................................................................................

15. WAGE RATES IN COMPETITIVE
LABOR MARKETS
16. WAGES AND EMPLOYMENT:
MONOPSONY AND LABOR UNIONS

357

17. INTEREST, RENT, AND PROFIT
18. INCOME DISTRIBUTION AND
POVERTY

410
431

390

PART 5 THE WORLD ECONOMY

457

...........................................................................................................................................................................................

19. INTERNATIONAL TRADE
459
20. EXCHANGE RATES, BALANCE
OF PAYMENTS, AND INTERNATIONAL
DEBT
488
21. THE ECONOMIC PROBLEMS OF LESSDEVELOPED ECONOMIES
513

PRACTICE TESTS ANSWER KEY
GLOSSARY
INDEX

AK-1
G-1

I-1

v

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


Contents
Learning Guide xvi
Letter to Students xviii
Farewell xxvi
Author xxix
Acknowledgments xxx

PART 1 THE BASICS OF ECONOMIC ANALYSIS

1

...........................................................................................................................................................................................

1. INTRODUCTION
No One Ever Made an Ounce of Earth

2
3

Are We Running Out of Natural Resources? 3

Renewable and Nonrenewable Natural Resources 3
Historical Perspective: Coal . . . Then (1865)
and Now (2011) 4
How Do You Satisfy Insatiable Wants? 4
Scarcity Forces Us to Make Choices 5

What Is Economics?

2. PRODUCTION POSSIBILITIES
AND OPPORTUNITY COSTS
Factors of Production

5

Economics Is Part of Social Science 5
Using Economic Models 6
Interdisciplinary Perspective: What Jaya Lewis’
Drawing and the Circular Flow Model Have In
Common 7
Maslow and Model Building 8
The Circular Flow Model of Goods and Money 8
Interdisciplinary Perspective: Honey Bees and
the Circular Flow Model 9
Microeconomics and Macroeconomics 10
Theoretical Perspective: Consumer Sovereignty and
Adams Smith’s “Invisible Hand” 11
Positive and Normative Economics 12

What Do Economists Know?

The Only Thing We Have to Fear
Is Fear Itself

U-Shaped and Hill-Shaped Curves 23
Vertical and Horizontal Curves 24

28

30

Opportunity Cost 31
The Law of Increasing Costs 32
Applied Perspective: Did You Ever Find a Penny
on a Sidewalk? 33
Once Rich, It’s Easy to Get Richer 34
Once Poor, It’s Easy to Stay Poor 35

The Productive Power
of Advanced Technology
12

35

Applied Perspective: China’s Bold Move along Its
Production Possibility Curve: More Capital, Less
Consumption 36
Applied Perspective: The Production of Human
Capital 37
The Indestructible Nature of Ideas 38
National Security, Conventional War,

and Terrorism in the 21st Century 39
Historical Perspective: The Destruction and
Reconstruction of Rotterdam 42

18

Possibilities, Impossibilities,
and Less Than Possibilities

42

18

Production Possibilities
and Economic Specialization

43

A Graphic Language 18
Know Your Point of Reference 18
Measuring Distances on Graphs 19
Graphing Relationships 20
Connecting Points to Form Curves 20

The Slope of a Curve

27

Labor 28
Capital 29

Land 29
Entrepreneurship 30

Robinson Crusoe’s Production
Possibilities

Nobel Laureates in Economics 12
Chapter Review 14
Key Terms 15
Questions 15
Practice Problem 16
Economic Consultants: Economic Research
and Analysis by Students for Professionals 16
Practice Test 17

APPENDIX: ON READING GRAPHS

Measuring the Slope of a Point on a Curve 25
Key Terms 26

Specialization on the Island 44
International Specialization 44
The Principle of Comparative Advantage 44

22

The Universality of the Production
Possibilities Model

46

Chapter Review 47
Key Terms 47
vii

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CONTENTS

viii

Questions 48
Practice Problems 48
Economic Consultants: Economic Research
and Analysis by Students for Professionals 49
Practice Test 50

3. DEMAND AND SUPPLY

Changes in Supply
Changes
Changes
Changes
Changes

52

Measuring Consumer Willingness

53

Measuring Consumer Demand

53

Measuring Individual Demand 53
Measuring Market Demand 54

Measuring Supply

54

Market-Day Supply 55

Determining Equilibrium Price

55

Suppose the Price Is $8 56
Suppose the Price Is $4 57
Price Always Tends Toward Equilibrium 57

Market-Day, Short-Run,
and Long-Run Supply

58

60

63

Technology 64
Resource Prices 64
the Prices of Other Goods 65
the Number of Suppliers 65

Why the Price of an Orange Is 30 Cents
at the Supermarket

65

Katrina and Gasoline Prices

67

Price as a Rationing Mechanism

68

Chapter Review 69
Key Terms 70
Questions 71
Practice Problems 71
Economic Consultants: Economic Research
and Analysis by Students for Professionals 72
Practice Test 73

APPENDIX: THE MARKET FOR
HUMAN ORGANS

Theoretical Perspective: How Long Does It
Take to Get to the Long Run? 60

Changes in Demand

in
in
in
in

74

How Much Is That Doggie in the Window? 74
The Case of the Guide Dog

75

From Dogs to Human Beings

76

The Market for Organ Transplants 76

Changes in Income 61
Changes in Taste 62
Changes in the Prices of Other Goods 62
Changes in Expectations About Future Prices 62
Changes in Population Size 62
A Change in Demand or a Change

in Quantity Demanded? 63

Scalping Tickets at a Yankees’ Game

78

Key Term 79
Questions 79
Practice Problems 79

PART 2 INTRODUCTION TO MICROECONOMICS

81

...........................................................................................................................................................................................

4. ELASTICITY
Demand Sensitivities and Insensitivities

82
83

Cross Elasticity

Expressing Demand Sensitivity
Graphically 83
Are Our Demand Sensitivities Alike? 84

What Factors Influence
Demand Sensitivity?

Global Perspective: Global Elasticities of Demand
for LDC Export Goods 93

84

Income Elasticity

96

Income Elasticity of Inferior Goods 98

Low-Priced Goods 85
Income Levels 85
Substitute Goods 86
Basic Goods 86
Linked Goods 87
Time to Adjust 87

Supply Elasticity

From Sensitivity to Elasticity

87

Applied Perspective: Cross Elasticity in the
Salmon Industry 99
Market-Day Supply Elasticity 99
Short-Run Supply Elasticity 100
Long-Run Supply Elasticity 100

Deriving Price Elasticities of Demand

88

Elasticities and Taxation

Elasticity and Total Revenue

90

Elasticity and the
Relevant Price Range

91

Estimates of Price Elasticities
of Demand

92

Per-Unit Tax Shifts the Supply Curve 102
The Ultimate Per-Unit Tax? 102
Chapter Review 102
Key Terms 103
Questions 103
Practice Problems 104
Economic Consultants: Economic Research
and Analysis by Students for
Professionals 105

Practice Test 106

Price Elasticities for Selected Agricultural
and Nonagricultural Goods 92
Short-Run and Long-Run Elasticities 92

93

Cross Elasticities among Substitute Goods 93
Cross Elasticities among Complementary
Goods 95

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98

100


CONTENTS

5. HAPPINESS, UTILITY, AND CONSUMER
CHOICE
Happiness and Utility

Did the Price Control System Work? 140

108

There’s Also Reason for Price Floors

109

Setting a Floor on Price 142
Living with Chronic Excess Supply 142

The Law of Diminishing Marginal Utility 110
The Water–Diamond Paradox 111

French Cuisine and Marginal Utility

112

Interdisciplinary Perspective: A Philosophical
Critique on the Marginal Utility of Money 112
Interdisciplinary Perspective: Napoleon and the
Law of Diminishing Marginal Utility 113

Utility and the Law of Demand

113

Making Selections from a Given Budget 114
Theoretical Perspective: Are White Rats Rational
Consumers? 116
The MU/P Equalization Principle 117
The MU/P Equalization Principle and the Law
of Demand 117

Creating Consumer Surplus

119

Creating Producer Surplus

119

Changes in Consumer and Producer
Surplus

120

Interpersonal Comparisons of Utility

121

Chapter Review 122
Key Terms 123
Questions 123
Practice Problems 123
Economic Consultants: Economic Research
and Analysis by Students for Professionals 124
Practice Test 125

127
127

130

Price Changes Shift the Budget Constraint 131

Income Changes, Too, Shift the Budget
Constraint 131

Deriving the Demand Curve
for Amusement Goods

132

Relating Quantity Demanded to Price 133
Appendix Review 134
Questions 134

135

The Fishing Economy, Once Again

136

Now, a National Security Crisis 136
Mobilizing Fishermen 136
Who Can Afford a $10 Fish? 138
Living with Chronic Excess Demand 139
Price Ceilings and Ration Coupons during
World War II 139
Global Perspective: Egypt and Tunisia and the
Winter of Their Discontent 140

The Effect of Technological Change
on Agricultural Supply

144

To Intervene or Not to Intervene:
That Is the Question

145

Parity Pricing as a Price Floor

145

The Farm Bill of 2008
A Long Tradition of Price Ceilings
and Price Floors

150
151

Chapter Review 151
Key Terms 152
Questions 152
Practice Problems 153
Economic Consultants: Economic Research
and Analysis by Students for Professionals 153
Practice Test 154

156

Entrepreneurial Traits

157

Entrepreneurs and Business Ownership

157

Sole Proprietorship

158

Interdisciplinary Perspective: Entrepreneurship:
Overcoming Adversity 159

Partnership

159

Corporation

160

The Security of Limited Liability 160
Setting Up the Corporation 160
The Sky’s the Limit in Stock Issues 161
Applied Perspective: Entrepreneurship
and Häagen Dazs 162
The Issue of Corporate Governance 163

165

Theoretical Perspective: Want to Minimize
Risk? Try a Mutual Fund 166

Profile of Stockholders

166

Indirect Stock Ownership 167

International and Multinational
Corporations
138

147

The Freedom to Farm Act of 1996 148
Interdisciplinary Perspective: Politics at Work:
Who Gets the Farm Subsidies? 149
Global Perspective: Farm Subsidies Around
the World 150

How U.S. Business Is Organized

6. PRICE CEILINGS AND PRICE FLOORS

Setting a Ceiling on Price

143

7. ENTREPRENEURSHIP AND BUSINESS

OWNERSHIP

Marginal Rate of Substitution 128
Constructing Indifference Maps 129

The Budget Constraint

Agriculture’s Technological
Revolution

History of Government Farm Bills

118

Identifying Equally Preferred
Sets of Goods

141

The Invention of Parity Pricing 145

The MU/P Guide to Auction Bidding

APPENDIX: THE INDIFFERENCE
CURVE APPROACH TO DEMAND CURVES

ix

Chapter Review 169
Key Terms 170

Questions 170
Economic Consultants: Economic Research
and Analysis by Students for Professionals 171
Practice Test 172

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168


CONTENTS

x

PART 3 THE MICROECONOMICS OF PRODUCT MARKETS

173

...........................................................................................................................................................................................

8. COSTS OF PRODUCTION
Getting into the Fishing Business
Total Fixed Costs

175
176
176

Committing to Fixed Costs 176
Calculating Fixed Costs 176

Total Variable Costs

178

The Cost of Labor 179
Theoretical Perspective: The cost of Labor and the
Law of Diminishing Returns 180
The Cost of Fuel 181
Interdisciplinary Perspective: Economics
of Scale and Nathaniel Hawthorne’s
The Scarlet Letter 181
The Costs of Bait, Ice, and Equipment 182
Adding Up the Variable Costs 182

What’s the Average Cost
of Producing Fish?

183

Average Fixed and Average Variable Costs 185
Average Total Cost 185

185

Theoretical Perspective: Explicit and Implicit Costs 187

Economies and Diseconomies of Scale

188

212

Do Firms Really Behave This Way?

214

216

Historical Perspective: Adam Smith:
On the Pursuit of Wealth 217
Chapter Review 217
Key Terms 218
Questions 218
Practice Problems 219
Economic Consultants: Economic
Research and Analysis by Students for
Professionals 220
Practice Test 221

10. IDENTIFYING MARKETS AND MARKET
STRUCTURES

Courts and Markets

223
224

Is a Rose Is a Rose Is a Rose? 224
Movies and Entertainment 224

Automobiles and Transportation 224

225

Interdisciplinary Perspective: The Diamond
Necklace 226

195
196

What Businesspeople Think About the
Character of Their Average Total Costs

197

Chapter Review 199
Key Terms 199
Questions 199
Practice Problems 200
Economic Consultants: Economic Research
and Analysis by Students for Professionals 201
Practice Test 202

Cross Elasticity Defines the Market

226

Cross Elasticities in the Flower
Market 227
Applied Perspective: Redefining Nike: From

Shoes to Swoosh 228
How High Is High Cross Elasticity? 228

Markets and Market Structures

229

The World of Monopoly

230

Size Is Not Important 230
The Firm Is the Industry 231
No Entry into the Industry 231
Historical Perspective: Shutting Out Foreign
Competition 234

9. MAXIMIZING PROFIT
Entrepreneurs and Profit Making

203
204

Profit-Maximizing Fishermen

205

Profit Depends on Price and Costs 205
Should You Produce More Fish? 205
Interdisciplinary Perspective: Simple Simon

and Profit Maximization 206
Focusing on the Margin 207
Total, Average, and Marginal Revenue 207

Maximizing Profit and
Minimizing Loss

193

What Is True for the Fishing Industry
Is True for All Industries

The MR ¼ MC Rule

211

190

Rightsizing or Downsizing Along the Long-Run
Average Total Cost Curve 195

Outsourcing

How Much Profit Is Maximum Profit?

Defining the Relevant Market

Applied Perspective: Big, Bigger, Biggest 193

Long-Run and Short-Run Average

Total Cost Curves

210

What Survives of Marginalism?
183

Marginal Cost

Applying the MR ¼ MC Rule

The Lester–Machlup Controversy 214
Empire Building 214
Interdisciplinary Perspective: Profit
Maximization and Greed 215

Total Cost

To Produce or Not to Produce,
That Is the Question

Theoretical Perspective: Drawing the Marginal
Revenue Curve 209

206

The World of Monopolistic Competition
and Oligopoly

234

No Easy Entry, But Entry 235
Close Substitutes 235
As Firms Enter, Demand Curve Becomes More
Elastic 236
Interdisciplinary Perspective: Loyal to a
Trash Bag? 238
The Role of Advertising 238

The World of Perfect Competition
Perfect Substitutes 240
Insignificant Market Share 240

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240


CONTENTS

Free Entry 241
Firms Cannot Influence Price 241

Putting Together a Scorecard
on Market Structures

12. PRICE AND OUTPUT DETERMINATION
UNDER OLIGOPOLY
Concentration Ratios
242

Chapter Review 243
Key Terms 244
Questions 244
Practice Problems 244
Economic Consultants: Economic Research
and Analysis by Students for
Professionals 246
Practice Test 247

11. PRICE AND OUTPUT IN MONOPOLY,
MONOPOLISTIC COMPETITION,
AND PERFECT COMPETITION
Monopoly Price and Output

250

The Firm Is the Industry 250
No Entry 251
Finding the Profit-Maximizing Price
and Quantity Combination 251
Less than Maximum Efficiency 252

Price and Output in
Monopolistic Competition
Firm Entry 253
Product Differentiation 253
Short-Run Equilibrium 254
Long-Run Equilibrium 254
Theoretical Perspective: Patents and Monopoly’s

Deadweight Loss 256
Making Normal Profit 256

Price and Output in Perfect
Competition

257

From Product Differentiation to
Identical Goods 257
Applied Perspective: Substitute Good: Close
and Even Closer 258

Short-Run Equilibrium

260

Interdisciplinary Perspective: From Thomas
Hardy’s The Mayor of Casterbridge 261

Long-Run Equilibrium

262

Maximum Efficiency 263
Lowest Prices and Greatest Output 264
The Firm’s Supply Curve 264
The Market’s Supply Curve 265

Innovators and Imitators in the

Perfectly Competitive Market

265

Historical Perspective: Perfect Competition in the
17th-Century Glass Engraving Industry: Imitation
Galore 266

Does Competition Always Generate
Lowest Prices and Highest Output?
The Schumpeter Hypothesis 267
Some, But Not All, Economists Agree 269
Chapter Review 269
Key Terms 270
Questions 270
Practice Problems 271
Economic Consultants: Economic Research
and Analysis by Students for
Professionals 272
Practice Test 273

267

276

281

Horizontal Mergers 282
Vertical Mergers 282
Global Perspective: Canada: On Mergers and

National Symbols 283
Conglomerate Mergers 283
Mergers Without Merging 284
Global Perspective: Cartel OPEC Cartel
OPEC Cartel OPEC 285
Concentration Ratios and Oligopoly Prices 286

Theories of Oligopoly Pricing
253

275

The Herfindahl-Hirschman Index 277
Global Perspective: Banking and the
Herfindhal-Hirschmann Index 277
Tracking Concentration Ratios 278
How Oligopolistic Is the U.S. Economy? 279
Is the U.S. Economy Becoming More
Oligopolistic? 279
Concentration Ratios and Market Power 279
Does the United States Have a Monopoly on
Oligopoly? 281

Concentrating the Concentration
249

xi

287

Game Theory Pricing 287
Suppose Dell Hires You As Its Price-Maker 288
Protecting Yourself against the Worst-Case
Scenario 288
Pursuing an Alternative Strategy: Tit-for-Tat 289
Let’s Not Play Games, Let’s Just Collude 289
Historical Perspective: The Prisoners’
Dilemma 290
Godfathers and Price Leadership 290
The Kinked Demand Curve 292

Brand Multiplication

294

Price Discrimination

294

Segmenting the Market 295
Price Discrimination Almost Everywhere 296
Gray Area of Price Discrimination 297
Chapter Review 297
Key Terms 298
Questions 298
Practice Problems 299
Economic Consultants: Economic Research
and Analysis by Students for Professionals 300
Practice Test 301

13. ANTITRUST AND REGULATION
Learning to Cope Without Perfect
Competition

303
304

Regulating Monopoly 304
Nationalizing the Industry 305
Taking a Laissez-Faire Approach 305
Encouraging Concentration 305
Interdisciplinary Perspective: Freedom
and Regulation 306
Splitting Up Monopoly 306

The Economics of Regulation
Regulating a City Bus Monopoly 307
Setting a “Fair” Price: P = ATC 308
Applying Marginal Cost Pricing: P = MC 309
Who Regulates the Regulators? 310
The Economics of Deregulation 310

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307


CONTENTS

xii

The Economics of Nationalization

312

Global Perspective: Countries and Airlines:
Nationalization, Denationalization and Never
Having Nationalized 312
Price Options Facing Government 313
Can the Government Run Industry Efficiently? 313

The Economics of Laissez-Faire

314

The Theory of Contestable Markets 314
Theoretical Perspective: Wal-Mart: Superman or
Captain Evil? 315
The Theory of Countervailing Power 316
The Theory of Creative Destruction 316

The Economics of Encouraging Monopoly

317

The Economics of Splitting Up Monopoly

318

The History of Antitrust Legislation

318

The Sherman Antitrust Act of 1890 318
Historical Perspective: Chronology of Key Acts
and Court Decisions 319
The Clayton Act of 1914 320
The Federal Trade Commission Act of 1914 320
Plugging the Loopholes 321
Funding Antitrust Legislation 321

Antitrust Goes to Court

321

The Rule of Reason 322
The Per Se Criterion 322
Rethinking the Reinterpretation 322
Conglomerates and the Court 323

But FTC and Justice Are Still in Business

323

Using the Herfindahl-Hirschman Index 323
Applied Perspective: How Do You Feel about
Pharmaceutical Commercials on Television? 325
Applied Perspective: FTC in Cyberspace 325
Going After the Precedent 325

Do We Have a Policy on Monopoly?

Economic Externalities

333

Externalities and Property Rights
Applied Perspective: Celebrities and Property
Rights: A Material View 334

Why Economists are Interested in
Externalities

334

Defining Market Failure 335
Applied Perspective: Tragedy of the Commons 335
Too Many Chickens, Too Low a Price 336
Global Perspective: Canadians Know That Acid
Rain Needs No Passport 338
What about the Pollution? 338

339

Correcting Market Failure

Government’s Attempt to Correct Market Failure 339
Creating New Property Forms 339
Levying a Pollution Compensation Tax 340
Creating Obligatory Controls 340

The Environmental Protection Agency 340
Theoretical Perspective: Coase Theorem and
Market Failure 341
Controlling Pollution by Allowing Pollution
Trading 342

Asymmetric Information and
Market Failure

342

Moral Hazard and Market Failure

343

Externalities and Public Goods

344

Positive Externalities and Market Failure 344
Positive Externalities and Public Goods 345
Public Goods and Near-Public Goods 346

346

Public Goods and Public Choice
325

Chapter Review 326
Key Terms 327

Questions 327
Economic Consultants: Economic Research
and Analysis by Students for Professionals 328
Practice Test 329

14. EXTERNALITIES, MARKET FAILURE,
AND PUBLIC CHOICE

Identifying Positive Externalities 332

Voting Your Demand for Public Goods 347
Government Failure 347
Living with Government Failure 349
Chapter Review 349
Key Terms 350
Questions 350
Practice Problems 350
Economic Consultants: Economic Research
and Analysis by Students for Professionals 351
Practice Test 352

331
332

Identifying Negative Externalities 332

PART 4 THE MICROECONOMICS OF FACTOR MARKETS

355

...........................................................................................................................................................................................

15. WAGE RATES IN COMPETITIVE LABOR
MARKETS
You Load Sixteen Tons
and What Do You Get?

The Supply of Labor
357
358

Hiring Miners, One at a Time 358
Converting Tons into Revenue 360

Deriving the Firm’s Demand for Labor

361

Deriving Marginal Labor Cost 361
Demanding Miners Until MRP=w 362
What Shifts the Demand for Labor? 363

Industry Demand for Labor

365

366

Interdisciplinary Perspective: Bruce Springsteen
on Work 367

What Shifts the Supply Curve for Labor? 367
The Backward-Bending Supply Curve 368

Deriving Equilibrium Wage Rates

369

Explaining Wage Rate Differentials

370

Narrowing Wage Rate Differences 370
Global Perspective: Immigrant Labor Supply:
An American Tradition 373
Historical Perspective: The Iron Law of Wages:
A 19th-Century View of Our Future 374

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


CONTENTS

17. INTEREST, RENT, AND PROFIT

xiii

410

Persisting Wage Differentials

375

The Economics of Minimum Wage Rates

376

Converting Loanable Funds to Capital
Equipment

412

The Ethics of W=MRP

378

Edwards’s Demand for Loanable Funds

412

The Efficiency Wages Theory

379

The Principal-Agent Problem

379

Loanable Funds in the Economy:
Demand and Supply

413

The Equilibrium Rate of Interest

414

The Ethics Associated with Interest

415

Global Perspective: The Worker Next Door 377

Chapter Review 380
Key Terms 381
Questions 381
Practice Problems 382
Economic Consultants: Economic Research
and Analysis by Students for Professionals 383
Practice Test 384

APPENDIX: WHO EARNS WHAT?
Productivity Counts

Somebody Did the Saving 415
Property and Property Rights 416
The Marxist View of Interest-Derived Income 416

386
386

Education Counts

387

Minority Status Counts

388

Disparities According to Race 388
Disparities According to Sex 388

How Important Are Minimum Wages?

389

16. WAGES AND EMPLOYMENT: MONOPSONY
AND LABOR UNIONS
390
Monopsony: When There’s Only
One Buyer of Labor

391

The Monopsony’s Supply Curve of Labor 391
Reading the Table in Exhibit 2 392

Choosing the Employment/Wage
Rate Combination

393

The Return to Monopsony Power 394

Enter the United Mine Workers Union

395

Applied Perspective: Monopsony Power
and Baseball 396
Employment and Wages in a Unionized Labor
Market 396
The Dynamics of Collective Bargaining 396

Higher Wage Rates Versus More
Employment

Present Value

397

399

The Knights of Labor 399
The American Federation of Labor 400
The Congress of Industrial Organizations 400
The AFL-CIO Merger: 1955 400
Labor, Congress, and the Courts 401
Applied Perspective: AFL-CIO’s Changing Views on
Immigration 402
Global Perspective: Unionization Elsewhere 403

Applied Perspective: Women in Unions 404
Chapter Review 404
Key Terms 405
Questions 405
Practice Problems 406
Economic Consultants: Economic Research
and Analysis by Students for Professionals 407
Practice Test 408

416

Historical Perspective: Using Money to
Make Money Was Not Always an Accepted
Practice 417
Effect of Changing Interest Rates on Property Values 417
Almost Anything Is Marketable Property 418

Income from Rent

418

The Derivation of Land Rent 418
Differential Rent 420
Global Perspective: A Vast Expanse of Land
Rent 420
Historical Perspective: The Corn Laws Controversy
in 19th-Century England 421
Location Rent 422
Wage-Related Rents 423

Income from Profits

424

We Are a Nation of Thomas Edisons 424
Chapter Review 425
Key Terms 426
Questions 426
Practice Problems 427
Economic Consultants: Economic Research
and Analysis by Students for Professionals 428
Practice Test 429

18. INCOME DISTRIBUTION AND POVERTY

Monopsonist Demands More,
Union Reluctant to Supply 397

Unions in the United States:
A Brief History

The MRP ¼ r Rule 413

431

Not Too Many Coal Miners Are
Millionaires

432

Measuring Income Distribution

433

The Lorenz Curve 433
Interdisciplinary Perspective: How Sweet Was Sweet
Auburn? 434
World Income Distribution: The Champagne Glass
Effect 436
Gini Coefficients of Inequality 437

How Unequal Is Our Income Distribution? 438
Is Income More Unequal in the United States Than in
Other Countries? 439
Distribution of Wealth 439

Is There an Optimal Income Distribution? 441
The Case for Equality 441
Theoretical Perspective: The New Superstar Culture
and Superstar Earnings 442
Theoretical Perspective: Rich and Poor: What’s Luck
Gotta Do With It? 443
Global Perspective: Climbing Out of Poverty Is
Becoming More Difficult 445
The Case for Inequality 445

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


CONTENTS

xiv

Do We Have to Live with Poverty?

447

Defining Poverty 448
Who and How Many Are in Poverty? 448

Fighting the War on Poverty

449

Lyndon Johnson’s War on Poverty 450
Historical Perspective: Does Welfare Condemn the
Poor to Poverty? 450
Making an Honest Effort? 450

The Negative Income Tax Alternative

Applied Perspective: How Much Is Your
Grandmother Worth? 452
Chapter Review 453
Key Terms 453
Questions 453
Practice Problems 454
Economic Consultants: Economic Research
and Analysis by Students for Professionals 454
Practice Test 455

451

PART 5 THE WORLD ECONOMY

457

...........................................................................................................................................................................................

19. INTERNATIONAL TRADE
Intrastate Trade

459
460

Illinois Corn for Illinois Oil 460
Oklahoma Corn for Oklahoma Oil 461

Interstate Trade

462

The Case for Geographic Specialization 463
Nobody Loses? 464

International Trade

464

Absolute and Comparative Advantage

465

Comparative Advantage 466
How Much Is Gained from Free Trade
Depends on Price 466

Calculating Terms of Trade

467

The Dilemma of the Less-Developed Countries 467
Looking at Real-World Numbers 468

Who Trades with Whom? Tracking
International Trade

469

The Major Leagues 470

Who Does the United States Trade With?

470

Do We Need Protection Against
Free Trade?

471

The
The
The
The
The
The

National Security Argument 471
Infant Industries Argument 472
Cheap Foreign Labor Argument 472
Diversity-of-Industry Argument 472
Antidumping Argument 473
Retaliation Argument 473

The Economics of Trade Protection

474

Chapter Review 482
Key Terms 483
Questions 483

489

The Foreign Exchange Market:
The Buying and Selling of Currencies

489

The Demand Curve for Yaps 490

The Supply Curve of Yaps 491
Shifts in the Demand Curve for Yaps 491
Shifts in the Supply Curve of Yaps 492

Floating Exchange Rates

492

Applied Perspective: Tourists at the Mall 493
Depreciation and Appreciation 493
Arbitrage Creates Mutually Consistent
Exchange Rates 494
Problems with Floating Exchange Rates 494
Fixing Exchange Rates 494
Global Perspective: Beggar-Thy-Neighbor 496
What If the Government Runs Out of Foreign
Exchange Reserves? 497

498

What Is a Balance of Payments Problem?

502

Global Perspective: The European Union’s Euro 503
Do Trade Imbalances Always Create Problems? 504

How Deficits on Current Account Develop 504
476

480

Global Perspective: The China Connection: Problem
or Promise? 481

The Regressive Character of Tariffs

The Money Tower of Babel

Balance on Current Account 498
Global Perspective: China’s Artificially
Pegged Yuan 501
Balance on Capital Account 502

GATT and WTO 477
Customs Unions 477
Global Perspective: U2 Can Be Irish! 478
Free Trade Areas 479
The North American Free Trade Agreement 479

Tracking Tariffs Since 1860

20. EXCHANGE RATES, BALANCE OF PAYMENTS,
AND INTERNATIONAL DEBT
488

Balance of Payments

Tariffs 474
Quotas 474

Other Nontariff Barriers 476

Negotiating Tariff Structures

Practice Problems 484
Economic Consultants: Economic Research
and Analysis by Students for Professionals 485
Practice Test 486

481

The
The
The
The

Trouble with
High Cost of
High Cost of
High Cost of

Being Popular 504
High Interest Rates 504
Budgetary Deficits 505
Low Productivity 505

International Debt

505

Will It All Work Out Right in the
Long Run?

506

Applied Perspective: Endemic LDC Debt 507
Chapter Review 508
Key Terms 509
Questions 509
Practice Problems 509

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


CONTENTS

Economic Consultants: Economic Research
and Analysis by Students for Professionals 510
Practice Test 511

21. THE ECONOMIC PROBLEMS OF
LESS-DEVELOPED ECONOMIES
Development Traps

Foreign Direct Investment and Foreign
Economic Aid

513
516

The Demographic Trap 516
The Political Instability Trap 518
Global Perspective: The Bets Are on India 519
The Natural Resource Trap 520
The Absence of Infrastructure Trap 521
Global Perspective: Internet and Infrastructure 522

Pursuing Strategies of Development
The Big Push 523
The Unbalanced Development Strategy 525

523

xv

526

Applied Perspective: Tracing Linkages: The Canned
Pineapple Industry in Indonesia 527
Foreign Direct Investment 527
Global Perspective: Famine and Foreign Economic
Aid: 2011 528
Foreign Economic Aid 529
Chapter Review 529
Key Terms 530
Questions 530
Economic Consultants: Economic Research
and Analysis by Students for Professionals 531
Practice Test 532
Practice Tests Answer Key

Glossary
Index

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.

AK-1
G-1
I-1


In Every Chapter You Will Find Features
That Make GOTTHEIL Even Greater
Updated Real Data
Many tables and graphs have been updated
with the most recent data available to ensure that
information is current and relevant.

The fifth edition presents an up-to-date collection
of the best economic resources on the Internet.
The URLs are placed in the context of key
economic points to enhance and bring additional
understanding.

perspectives
These updated, socially relevant sidebar features
illustrate economic applications in many different contexts—historical, theoretical, global,
interdisciplinary—and how they apply to business and
daily life.

ChatEconomics

Introductions to the book's eight parts capture reallife conversations about economics between Gottheil
and students. They demonstrate why the content that
follows is important.

Each chapter now presents significant questions at
key junctures in the text so that you can assess your
comprehension as you read.

Key Graphs
Updated exhibits emphasize critical graphic concepts
in a clear, efficient manner to demonstrate the most
helpful graphing principles. “Key Graphs” icons highlight exhibits that demonstrate crucial principles.

xvi

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Enhanced

End-of-Chapter

Questions and Practice
End-of-chapter questions test your understanding of
qualitative concepts covered in each chapter. Practice
Problems test your understanding of quantitative or
graphical techniques. Both have been updated.

Economic Consultants

chapter. New Internet links help you with research and
analysis.

Chapter Review
and Key Terms
These features briefly review the principles and new
vocabulary introduced in the chapter.

practice
© Image 100/Royalty-Free/CORBIS

This activities feature puts
you in the role of the
economist for a hypothetical
economic research and
analysis firm. The work
requires economic thinking
and analysis as you prepare
a report for a client,
addressing the fundamental
economic issues from the

Material

test

You can quickly assess your understanding of each
chapter with eight to ten updated multiple-choice,
exam-like problems that address the key principles in
the chapter. Answers are available in the back of the

book.

xvii

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Dear Student,
I may be a little biased, but I honestly believe that the economics course you are about to take will
be the most exciting intellectual experience of your college career. When I took economics in college
decades ago, it literally blew my mind! It changed the way I saw the world around me. I think that
will happen to you.
The study of economics will open up a world of understanding about who you are and how you
relate to your community, your country, and the world you live in. It will tell you much about your
past, your present, and most important, your future. Economics deals with many real-world issues
that you will confront the rest of your life, among them the curse of poverty amid plenty, the
problems associated with monopoly and market regulation, the causes of the wealth of nations and
why some nations lag behind others, and why our economy repeatedly slips into periods of recession and unemployment. Economics, you will see, is a powerhouse of issues, ideas, and policies.
Many of you may have heard through the student grapevine that economics is difficult and even
esoteric. Not so. Think about it: Most students actually do quite well. There is always a healthy
percent of As and Bs. Even C students admit to having learned a lot. If most students can do well
in economics, so can you. While the course itself is not difficult, it does require you to give it an
honest effort. The keys to your success in economics will be attending classes, listening to your lectures, reading your text, taking notes, checking those notes against the text, working through practice exercises, and asking questions. Asking questions is the best learning experience. Keep asking
until the answers make sense.
It has been my experience as a teacher that students are somewhat reluctant to participate in classroom discussion, so when you ask a question in class about material in the lecture or textbook,
everyone in class will appreciate it. And the probability is high that most of your classmates and
sometimes even your professor could not answer it! It makes you hunt for answers. It makes you
think. Everybody gains, especially you.
In fact, you may notice that the economic analysis in this textbook is often built on questions. Check
it out. Almost every page asks questions that are followed by answers. I have found that to be the

best way to teach and learn. Read this textbook carefully. I think you will enjoy its conversational
style and, most important, what it tells you about your world. Good luck!

Fred Gottheil
email:
phone: 217-333-4591

xviii

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To the

Instructor

Working on this seventh edition turned out to be just as rewarding as working on
each of the earlier ones. Frankly, that didn’t surprise me. Because there is always
a new idea or a new way of expressing an old idea that makes the telling of the
economics story more revealing and perhaps even more appealing to the student. As well, the world around us keeps changing and many of these changes
have direct bearing on what we teach.
That said, principles are principles and the core material that makes up our
micro and macro analyses remain pretty much intact. As the French are fond of
saying plus ca change, plus c’est le meme chose, meaning “the more things
change, the more they remain the same.” And there’s much truth in that, certainly concerning the study of economics. After all, Alfred Marshall wrote his
Principles of Economics in 1891 and, at least for much of our microeconomic
theory, is as current today as it was then. What economists have done since
Marshall is elaborate on the concepts he introduced and apply them to the
twenty-first century we now inhabit. Marshall would certainly appreciate much
of the elaborations we have made on the principles and even the new insights

we have drawn from his ideas.
That’s what I—and other authors of principles text books—have done in the
many editions of textbooks that followed the original. The principles remain the
bedrock of our analysis, the applications vary to underscore the idea that the
principles can be used to explain what is happening in the changing world
about us.
This seventh edition incorporates some new topics and expands on others
already covered. For example, attention is given in this edition to the current
research on the Economics of Happiness and this new research is integrated
into utility analysis. As well, more attention is given in the principles of microeconomics to the role of entrepreneurship. In the principles of macroeconomics,
this seventh edition analyzes the 1933 Glass-Steagall Act to show how its repeal
in 1999 contributed to the rash of foreclosures that continues to plague our
economy. The Keynesian concept of the liquidity trap is new to the text and is
added to help explain the factors that undermine the effectiveness of monetary
policy.
As the editions progressed from the first to this seventh, I have tried to show
that the economic principles we teach are imbedded in not only in the other social
sciences but in the humanities as well. The literary masters of English and American
literature—both prose and poetry—wrote about their economic societies in ways
that economists simply couldn’t have. I have drawn from some. If you look for it,
you find concern about economic life in William Shakespeare, Thomas Hardy, John
Steinbeck, Emile Zola, Guy de Maupassant, George Bernard Shaw, Percy Bryce

xix

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Shelly, and Gertrude Stein. I introduce the student to Oliver Goldsmith’s poem
The Deserted Village. The poem, a tribute to his father, describes the transformation of the economic society of his time, painting so beautifully and vividly—and

painfully—the poverty-amidst-plenty conditions of his 18th century England. Some
three centuries later, Joyce Sutphen’s poem “Guys Like That” paints an unflattering picture of the kinds of people who were instrumental in causing the 2008 financial meltdown. Even in economics, poetry matters.
Fred

A BOOK WRITTEN FOR THE STUDENT
I wrote this textbook with a basketful of questions in mind. These were questions students ask semester after semester. Typically, they reflect the “red flag”
kinds of problems students have in understanding the economics we teach. As
President Clinton was fond of saying: “I feel your pain.” Well, I think I know
what troubles these students and address those troubles. This text talks directly
to them, providing answers to anticipated questions. A reviewer who had
worked on many textbook manuscripts before mine remarked that mine was the
most “nonthreatening” principles textbook he had ever read. He got it right! I
tried always to keep the analysis within reach of the student. Make the analysis
accessible, even personal. Allow the student to appreciate the learning
experience, not just to think about the coming exam.
As you know, we absorb ideas in many ways: through our heads, our hearts,
and, for lack of better words, our gut reactions. An idea that stirs you emotionally has staying power. If you can feel the importance and relevance of an idea,
it becomes more than an academic exercise. The approach I use is intentionally
conversational, but the discussion is always serious. I believe economists have
something to offer the student. That's what this textbook is about.

Distance Cutting: The Student, the Professor,
the Textbook
This text is designed to cut the distance that exists between professor, textbook, and student. Too often that distance creates adversarial roles. Students
see themselves as “we,” their professors (and their TAs) as “them,” and the
textbook as “an obstacle to be overcome.” How many times have you heard a
student ask: “What chapters do I have to read for the exam?” Not: “What chapters will help me understand the material you covered in class?” Nothing subtle
about the differences in language and attitude, is there? You've experienced
the difference. I certainly have.
The success of this text, I believe, is in the converting of “we” and “them” to

“us.” I wanted the student to know that he or she, the professor, and the textbook are on the same side. It’s important to remember that we're not just
teaching economics, we’re teaching students. Of course the subject matter is
economic principles, but the focus must be on the student.
This textbook makes the student the centerpiece of the analysis. It talks to
the student. The analysis is built on a series of stories and scenarios that make
sense to the student because the stories and scenarios are part of the student's
life, or at least familiar to her or him. Recognizing themselves in the analysis
matters. It is part of cutting distance.

xx

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Questions as a Learning Tool
The text’s narrative is built on questions. There is hardly a paragraph in which a
question concerning the analysis does not precede discussion. Why questions?
Because I believe the best way to understand an idea or concept is to introduce
it in the form of a question. Then go to the answer. The end result is a built-in
dialogue that is conversational, that teaches.
Compare these two modes of communicating an idea: (1) “The child likes
chocolate ice cream”; and (2) “What’s the child’s favorite ice cream?” “Oh, she
loves chocolate.” Do you hear the dialogue in the second version? When the student reads it, the student is necessarily engaged in the dialogue. It makes
it virtually impossible for the student not to participate. Pick a page—any page—
in this text and see how dialogue dominates the discussion.

And Focusing on the Basics
I love the story of a schoolboy who visits the public library in search of
information on penguins needed to write a school essay. The librarian recommends a book. The child takes it to the reading table but, after a few minutes,
returns it to the librarian. “What wrong with the book?”she asks. “Nothing

really,” comes the reply. “It just tells me more about penguins than I wanted to
know.”
Perhaps one reason students have trouble understanding the principles of
economics is that we overload them with esoteric information, which we insist is
part of basic economics. To us, it may indeed be basic. To a student looking at
economics for the first time, however, it may be anything but basic. How
basic then should basic be? Admittedly, that’s a tough question, but one that
ultimately distinguishes a good text from a host of others. In this respect,
the difficult decisions that I had to make in writing the textbook were not what
to include but what to leave out, and where to find the appropriate level of
sophistication that does not shortchange the student or leave him or her
mystified and panicked. I often chose to sacrifice new ideas and scores of
recent research studies to keep the discussion focused on the basics.

The Approach: Looking at Content
The importance of the MR=MC rule in microeconomics cannot be overstated. It is
the key to price determination. In most texts, this idea is developed in the chapter
on perfect competition. That is a dreadful mistake! It means students have to cope
with many new and complex concepts simultaneously. They must learn about MR,
then about P=MR as the horizontal demand curve for the firm, and then about the
relationship between that demand curve and industry demand. Finally, they confront long-run equilibrium for both the firm and industry, P=MR=MC=ATC. Why
start with the most difficult market structure? In this text, I devote a complete chapter to the idea of profit maximization, MR=MC, prior to the analysis of market structure or price determination. The focus is only on the MR=MC rule to profit
maximization. It allows me—us—to discuss the idea of why marginal analysis lends
itself to maximum profit. It affords the opportunity of providing, in an unhurried
manner, illustrations and scenarios of how profit maximization evolves. It makes a
whale of a difference to the students.
International trade is no different from any other kind of trade. All that separates
international from domestic trade are national borders. That is the message in this
text. So the analysis starts with specialization and trade between Illinois and
xxi

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Oklahoma. Absolute and comparative advantages are analyzed in this context.
Once the student understands the idea, we go to Mexico and beyond. To
appreciate this idea—markets are markets everywhere—is to appreciate the one
consensus economists believe in: all trade creates win-win outcomes. That’s
exciting!

Seventh Edition: New and Improved
Textbooks should not be treated like soft drinks and soap detergents. There is
no reason to claim a “new and improved” edition every time an edition-cycle
year comes around. After all, most textbooks are products of years of experimentation and experience in classroom teaching, of writing and rewriting
countless drafts of the text until you think you have it right. How can your text
be “new and improved” with every edition? What does it say about the
previous ones?
This seventh edition is very much like the sixth. Frankly, I liked the way the
first edition turned out. So did the adopters and their students. The style and
analysis of the first carried into the succeeding editions without much change,
and this seventh edition is much in the tradition of the earlier ones. The narrative is much the same. The conversational approach is still there. The analysis of
principles is still explained in easy-to-understand scenarios. If you liked the earlier editions, rest assured you’ll like this seventh. Are there any changes? Of
course there are! As you would expect, data have been updated. As well, many
boxed perspectives have been revised to reflect the issues that have become
center stage in our social, economic, and political life. Critical events and issues
over the past three years are used as part of the analysis, not because they are
the “big” issues but because they serve as excellent platforms to discuss basic
economic principles. For example:
l

l

We don’t have to explain to anyone that the housing and banking crises we
now confront have changed the economic fortunes and lives of millions of
Americans but we do have to explain why these crises have surfaced in the first
place. The analysis on money creation is expanded in this seventh edition to
do just that.
The major networks and cable news are still hammering away at the impact
Mexican immigration has had on the wages and incomes of Americans in
highly contestable, low-income yielding labor markets. As well, the demands
made by undocumented workers and their families on our public institutions,
such as schools and medical facilities are hotly debated political issues. The
text addresses these issues. In 1960, Mexicans, as a percent of foreign born
Americans, was 5.9 percent. In 2009, that percent increased to 28.6. What
stimuli explain that sharp increase? What impact does that immigration have
on both the U.S. and Mexican labor markets? This seventh edition looks into
these questions.

I promise you this: This text is a learning experience. If students read it, it will
make your task in the classroom all that much easier and more enjoyable. And
they will read it once they get into it. That was my goal and I know—after receiving considerable unsolicited e-mails from students in almost every state in
the country and from their professors as well—that I pretty much achieved that
goal. Nothing is perfect and, admittedly, this text is no exception. But it is a
fine, student-friendly text. If this claim strikes you as singularly immodest or
even downright brash, accept my apologies. But I swear by it!

xxii

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USE OF PERSONAL NAMES
I believe that economics is about people. As you read through the chapters,
you can’t help but see many, many names that personalize the discussion.
Claudia Preparata buys fish, Diane Pecknold inherits a tobacco farm, Charles
Edwards owns a coal mine, Nick Rudd is in the ice cream business. These, along
with over 90 more, are real people. They are all friends of my son Joshua, who
died in 1989, at age 19, a victim of lymphoma. The text book is my way of
honoring Josh and honoring as well the beautiful people who were a part of
his life.

xxiii

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Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.


Improved

Support

Instructor’s Manual
Written and updated by textbook author Fred
Gottheil, this indispensable resource gives you ideas
on how to approach each chapter, tips on how to
present the material, and alternative illustrations for
explaining points of theory and policy. It also discusses
how to turn student questions into teaching opportunities. Organized for easy reference, the manual also

provides detailed answers to the Questions sections
that appear at the end of each chapter in the text.

Test Banks
The Test Bank includes multiple-choice, true/false,
and essay questions and answers, along with an assignment of difficulty level with each question.

for Instructors
PowerPoint Slides
PowerPoint slides are available for use by students as
an aid to note-taking, and by instructors for
enhancing their lectures. More than 1,400 slides are
included, which consist of key graphs taken from the
textbook as well as lecture slides to help the instructor better integrate the material into the classroom
presentation.

Instructor’s Resource
CD-ROM
This easy-to-use CD enables you to review, edit, and
copy a huge selection of instructor ancillaries from
your desktop in the format you select.

xxv

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Farewell
Friday, May 12, 1989
The Champaign-Urbana News-Gazette Weekend

“His eyes would light up and he'd talk fast and you couldn’t help being
excited about the band or record he’d discovered, too.”
P. Gregory Springer

News-Gazette file photo

Part of being young is the feeling of being indestructible.
Josh Gottheil, who died last month after a two-year battle
against leukemia, probably understood that he wouldn’t
live forever. But he never stopped working to bring the
music he loved to the world around him. Rock and roll
would carry on.
The punk movement—simultaneously cynical and realist
and suicidal and idealistic—tried in a frenzy to wipe out
the commercialism and mass media hallucination which
blurred life’s realities, even unpleasant ones like death.
There were bands named Dead Kennedys, Dead Milkmen,
the prototype Dead Boys, and Gottheil’s local band, Dead
Relatives.
When he was only a sophomore in high school, Gottheil
became a drummer for the short-lived band, but he was no
angry punk. He heard the message in the music and he set
out, ambitious at a tender age, to deliver it to the community.
At 17, he already had promoted dozens of concerts for
teens in community centers and church foundations. He
was the least pushy music promoter I ever met, enticing
me to see at least one political rock and folk concert
through his complete, quiet reticence.
It was the music that spoke to and through him.
At one concert he arranged, I watched Billy Bragg and

Michelle Shocked get their introductions to the area. And I
saw Josh, standing by the door at Mabel’s, anxious to see
that the message and the feeling came across.
His bands rarely disappointed.
Among the many other national bands he brought to
Champaign’s clubs were Living Colour, They Might Be
Giants, Soul Asylum, Throwing Muses, Jane’s Addiction,
Dead Milkmen, Hüsker Dü, Let’s Active, Timbuk 3, Ministry, and the Pixies.
“The scene wouldn’t be what it was today without Josh,” said Chris Corpora,
an area rock promoter of Trashcan Productions. “He didn’t look the part and he
risked his own money. About four years ago he started teen nights when there
was a lull in the scene. I don’t want to deify him, but he had an incredible will,
poise, and the wherewithal to get contracts signed and do things he probably
shouldn’t have been able to do. When I was 15, I couldn’t even read a contract.”

xxvi

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FAREWELL

Even in the hard-core punk scene, Josh maintained a romantic side, often bringing
roses for the girls in his favorite bands, notably Throwing Muses and the Pixies.
“He was always in love with every girl in a band,” said Katy Stack, one of
many people who considered Josh a best friend.
“He made friends with the Pixies and we flew to California to see them play
in San Francisco,” Stack said. “They invited him on stage to sing.”
For a couple of summers, he worked at the desk at Crystal Lake Pool, announcing the adult swim and checking in bags. After high school, he took some college classes in philosophy and math at Parkland and at the UI, where his father,
Fred, is a professor of economics. When he got sick, “it didn’t look like he needed

to go to college,” according to Stack. “He was real busy doing all the music and
he always had a lot of money. He was the only 16-year-old that had $2,000 in his
checking account.”
Another friend, Shara Gingold, actually wrote a book about her crush on Josh.
“He was two years older. The book is called ‘I Love You, Josh. Do You Even
Know I Exist?’,” said Gingold, who lives in Urbana. “I think that it was [the fact
that] he was very understanding and caring. We’d meet to play tennis and then
we’d just sit and hit the tennis ball against the wall and talk about everything.”
Last year, his health started to improve. He gained weight. He was working at
Record Swap, surrounding himself in music during the day for the concerts he
promoted at night. He had teamed with Chicago promoter Tony Polous, established a limited partnership called Concert One Productions, rented an office in
Chicago’s Mercantile Building, and developed the financing for big arena shows.
“Josh was destined to be huge,” said Polous from the Chicago office. “He was
the most effective, easy-going person I ever met. It’s not hard to master being
pushy and strong. Josh mastered being effective in an unassuming way.
“When he had to go back to the hospital, he never let on how sick he was.
Every day I’d call him and he’d ask about what this manager was doing or that
agent and he’d make decisions. We never really talked about his health. I never
thought he was going to die. I think about him every day.”
Despite his illness, Josh moved to Chicago last fall to be immersed in the
music business.
“It was a chance, a break, an exciting thing to do. The world was his to conquer,”
said Fred Gottheil from his UI office. “I remember going up to visit and spend the
night. The wind was howling, but he was so proud of the apartment. He was designing tickets on his computer, telling me [about] all the bands he had booked, his new
ideas, bubbling with enthusiasm for the possibilities. The move was exhilarating for
him. He called home quite frequently, but [Chicago] was where he had to be.”
Said former Champaign-Urbana DJ Charlie “The Quaker” Edwards, who
shared the Chicago apartment, “He had a real vitality, youth, and infectiousness.
His eyes would light up and he’d talk fast and you couldn’t help being excited
about the band or record he’d discovered, too. Even though there was almost

20 years age difference between us, we’d listen to albums and talk about the
bands and share a mutual excitement.
“He was a really good, serious businessman. Much better than I could have
been, always dealing with five shows at once. He really loved it, too. He just
loved the music.”
“Definitely, there are people who are into [punk] because it is a fad,” Gottheil said
three years ago. “But for the people who really believe in it, it won’t die for them.”
Josh Gottheil died April 4 at Barnes Hospital in St. Louis, three months short of
his 20th birthday. There was a turn-away crowd for his funeral on April 7 at the
Sinai Temple in Champaign. Because he did so much to bring a new attitude about
music in this area, one of the bands he helped find national prominence, Throwing
Muses, has donated its performance at a benefit concert this Sunday at Mabel’s, with
proceeds going to the Josh Gottheil Memorial Fund for Lymphoma Research.

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