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KEYS TO ECONOMIC PROSPERITY
These keys to the economic prosperity of a nation are highlighted throughout the text.

1. Human Ingenuity. Economic goods are the result of human ingenuity and action;
thus, the size of the economic pie is variable, not fixed. [Chapter 2]

2. Private Ownership. Private ownership provides people with a strong incentive to take
care of things and develop resources in ways that are highly valued by others. [Chapter 2]

3. Gains from Trade. Trade makes it possible for individuals to generate more output
through specialization and division of labor, large-scale production processes, and
the dissemination of improved products and production methods. [Chapter 2]

4. Invisible Hand Principle. Market prices coordinate the actions of self-interested

individuals and direct them toward activities that promote the general welfare.
[Chapter 3]

5. Profits and Losses. Profits direct producers toward activities that increase the value
of resources; losses impose a penalty on those who reduce the value of resources.
[Chapter 3]

6. Competition. Competition motivates businesses to produce efficiently, cater to

the views of consumers, and search for innovative improvements. [Chapter 10]

7. Entrepreneurship. The entrepreneurial discovery and development of improved

products and production processes is a central element of economic progress.
[Chapter 11]

8. Productivity and Earnings. In a market economy, productivity and earnings are closely
linked. In order to earn a large income, one must provide large benefits to others.
[Chapter 14]

9. Innovation and the Capital Market. If the potential gains from innovative ideas and
human ingenuity are going to be fully realized, it must be relatively easy for individuals
to try their innovative and potentially ingenious ideas, but difficult to continue if the
idea is a bad one. [Chapter 15]

10. International Trade. When people are permitted to engage freely in international
trade, they are able to achieve higher income levels and living standards than would
otherwise be possible. [Chapter 17]

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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
MICROECONOMICS
PRIVATE AND PUBLIC CHOICE • 16E

JAMES D. GWARTNEY
Florida State University

RICHARD L. STROUP
Montana State University

RUSSELL S. SOBEL
The Citadel

DAVID A. MACPHERSON
Trinity University, San Antonio TX

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Microeconomics: Private and Public Choice, 16e © 2018, 2015 Cengage Learning
James D. Gwartney
Richard L. Stroup ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
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BRIEF CONTENTS
INDEX

Preface xv
Acknowledgments xx
About the Authors xxii
Part 1: The Economic Way of Thinking 1
Chapter 1 The Economic Approach 2
Chapter 2 Some Tools of the Economist 18
Part 2: Markets and Government 41
Chapter 3 Demand, Supply, and the Market Process 42
Chapter 4 Demand and Supply: Applications and Extensions 68
Chapter 5 Difficult Cases for the Market, and the Role of Government 92
Chapter 6 The Economics of Political Action 109
Part 3: Core Microeconomics 131
Chapter 7 Consumer Choice and Elasticity 132
Chapter 8 Costs and the Supply of Goods 150
Chapter 9 Price Takers and the Competitive Process 173
Chapter 10 Price-Searcher Markets with Low Entry Barriers 193
Chapter 11 Price-Searcher Markets with High Entry Barriers 211
Chapter 12 The Supply of and Demand for Productive Resources 234
Chapter 13 Earnings, Productivity, and the Job Market 252
Chapter 14 Investment, the Capital Market, and the Wealth of Nations 269
Chapter 15 Income Inequality and Poverty 286
Part 4: International Economics 305
Chapter 16 Gaining from International Trade 306
Part 5: Applying the Basics: Special Topics in Economics 329
Special Topic 1: Government Spending and Taxation 330
Special Topic 2: The Economics of Social Security 345
Special Topic 3: The Stock Market: Its Function, Performance, and Potential as an
Investment Opportunity 355
Special Topic 4: Keynes and Hayek: Contrasting Views on Sound Economics and the
Role of Government 365
Special Topic 5: The Great Recession of 2008–2009: Causes and Response 371
Special Topic 6: Lessons from the Great Depression 386
Special Topic 7: The Economics of Health Care 400
Special Topic 8: Earnings Differences between Men and Women 413
Special Topic 9: Do Labor Unions Increase the Wages of Workers? 420
Special Topic 10: The Question of Resource Exhaustion 431
Special Topic 11: Difficult Environmental Cases and the Role of Government 442
Appendix A General Business and Economics Indicators for the United States 451
Appendix B Answers to Selected Critical Analysis Questions 458
Glossary 470
Index 477

v
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 CONTENTS

Preface xv
Acknowledgments xx
About the Authors xxii

Part 1 The Economic Way of Thinking 1

Chapter 1 The Economic Approach 2
1-1 What Is Economics About? 4
1-1a Scarcity and Poverty Are Not the Same 5
1-1b Scarcity Necessitates Rationing 6
1-1c The Method of Rationing Influences the Nature of Competition 6
1-2 The Economic Way of Thinking 7
1-2a Eight Guideposts to Economic Thinking 7
1-3 Positive and Normative Economics 13
1-4 Pitfalls to Avoid in Economic Thinking 13
1-4a Violation of the Ceteris Paribus Condition Can Lead One to Draw the Wrong Conclusion 13
1-4b Good Intentions Do Not Guarantee Desirable Outcomes 14
1-4c Association Is Not Causation 15
1-4d The Fallacy of Composition: What’s True for One Might Not Be True for All 15
Looking Ahead 16
Key Points 16
Critical Analysis Questions 16

Chapter 2 Some Tools of the Economist 18

2-1 What Shall We Give Up? 19
2-1a Opportunity Cost 19
2-1b Opportunity Cost and the Real World 20
2-2 Trade Creates Value 21
2-2a Transaction Costs—A Barrier to Trade 22
2-2b The Middleman as a Cost Reducer 22
2-3 The Importance of Property Rights 23
2-3a Private Ownership and Markets 26
2-4 Production Possibilities Curve 28
2-4a Shifting the Production Possibilities Curve Outward 30
2-4b Production Possibilities and Economic Growth 32
2-5 Trade, Output, and Living Standards 33
2-5a Gains from Specialization and Division of Labor 33
2-5b Gains from Mass Production Methods 34
2-5c Gains from Innovation 34
2-6 Human Ingenuity and the Creation of Wealth 35
2-7 Economic Organization 36
2-7a Market Organization 36
2-7b Political Organization 36
Looking Ahead 37
Key Points 37
Critical Analysis Questions 38
Addendum 39
Comparative Advantage, Specialization, and Gains from Trade 39

vi
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 CONTENTS vii

Part 2 Markets and Government 41

Chapter 3 Demand, Supply, and the Market Process 42
3-1 Consumer Choice and the Law of Demand 43
3-1a The Market Demand Schedule 44
3-1b Consumer Surplus 45
3-1c Responsiveness of Quantity Demanded to Price Changes: Elastic and Inelastic
Demand Curves 46
3-2 Changes in Demand versus Changes in Quantity Demanded 47
3-3 Producer Choice and the Law of Supply 51
3-3a The Role of Profits and Losses 52
3-3b Supply and the Entrepreneur 53
3-3c Market Supply Schedule 53
3-3d Producer Surplus 54
3-3e Responsiveness of Quantity Supplied to Price Changes: Elastic and Inelastic Supply Curves 55
3-4 Changes in Supply versus Changes in Quantity Supplied 56
3-5 How Market Prices Are Determined: Demand and Supply Interact 57
3-5a Market Equilibrium 58
3-5b Efficiency and Market Equilibrium 59
3-6 How Markets Respond to Changes in Demand and Supply 61
3-6a Invisible Hand Principle 63
3-6b Prices and Market Order 64
3-6c Competition and Property Rights 65
Looking Ahead 66
Key Points 66
Critical Analysis Questions 67

Chapter 4 Demand and Supply: Applications and Extensions 68

4-1 The Link between Resource and Product Markets 69
4-2 The Economics of Price Controls 70
4-2a The Impact of Price Ceilings 71
4-2b Rent Control: A Closer Look at a Price Ceiling 73
4-2c The Impact of Price Floors 74
4-2d Minimum Wage: A Closer Look at a Price Floor 75
4-3 Black Markets and the Importance of the Legal Structure 78
4-4 The Impact of a Tax 78
4-4a The Deadweight Loss Caused by Taxes 80
4-4b Actual versus Statutory Incidence 80
4-4c Elasticity and the Incidence of a Tax 81
4-4d Elasticity and the Deadweight Loss 83
4-5 Tax Rates, Tax Revenues, and the Laffer Curve 83
4-6 The Impact of a Subsidy 87
4-6a Elasticity and the Benefit of Government Subsidy Programs 88
4-6b Real-World Subsidy Programs 88
Looking Ahead 90
Key Points 90
Critical Analysis Questions 90

Chapter 5 Difficult Cases for the Market, and the Role of Government 92
5-1 A Closer Look at Economic Efficiency 93
5-2 If It’s Worth Doing, It’s Worth Doing Imperfectly 94
5-3 Thinking about the Economic Role of Government 95
5-3a Protective Function of Government 95
5-3b Productive Function of Government 96
5-4 Potential Shortcomings of the Market 96
5-4a Lack of Competition 96
5-4b Externalities—A Failure to Account for All Costs and Benefits 98
5-4c External Costs 98
5-4d External Benefits 100

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viii CONTENTS

5-4e Public Goods and Why They Pose a Problem for the Market 102
5-4f Potential Information Problems 103
5-4g Information as a Profit Opportunity 104
5-5 Market and Government Failure 106
Looking Ahead 107
Key Points 107
Critical Analysis Questions 107

Chapter 6 The Economics of Political Action 109

6-1 The Size and Growth of the U.S. Government 110
6-2 Similarities and Differences between Political and Market Allocation 112
6-3 Political Decision-Making: An Overview 113
6-3a Incentives Confronted by the Voter 114
6-3b Incentives Confronted by the Politician 115
6-3c Incentives Confronted by the Government Bureaucrat 116
6-4 When the Political Process Works Well 117
6-5 When the Political Process Works Poorly 119
6-5a Special-Interest Effect 119
6-5b Shortsightedness Effect 123
6-5c Rent-seeking 123
6-5d Inefficiency of Government Operations 124
6-6 Political Favoritism, Crony Capitalism, and Government Failure 125
6-7 The Economic Way of Thinking about Markets and Government 127
Looking Ahead 128
Key Points 128
Critical Analysis Questions 129

Part 3 Core Microeconomics 131

Chapter 7 Consumer Choice and Elasticity 132
7-1 Fundamentals of Consumer Choice 133
7-2 Marginal Utility, Consumer Choice, and the Demand Curve of an Individual 134
7-2a Consumer Equilibrium with Many Goods 136
7-2b Price Changes and Consumer Choice 137
7-2c Time Costs and Consumer Choice 137
7-2d Market Demand Reflects the Demand of Individual Consumers 138
7-3 Elasticity of Demand 139
7-3a Graphic Representation of Price Elasticity of Demand 141
7-3b How Large Are the Demand Elasticities of Various Products? 142
7-3c Why Do the Price Elasticities of Demand Vary? 143
7-3d Time and Demand Elasticity 145
7-4 How Demand Elasticity and Price Changes
Affect Total Expenditures (or Revenues) on a Product 145
7-5 Income Elasticity 146
7-6 Price Elasticity of Supply 147
Looking Ahead 148
Key Points 148
Critical Analysis Questions 148

Chapter 8 Costs and the Supply of Goods 150

8-1 The Organization of the Business Firm 151
8-1a Incentives, Cooperation, and the Nature of the Firm 151
8-1b Three Types of Business Firms 152
8-2 How Well Does the Corporate Structure Work? 153
8-3 The Economic Role of Costs 154
8-3a Calculating Economic Costs and Profits 154
8-3b How Do Economic and Accounting Profit Differ? 155
8-4 Short-Run and Long-Run Time Periods 155

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 CONTENTS ix

8-5 Categories of Costs 156

8-6 Output and Costs in the Short Run 158
8-6a Diminishing Returns and Production in the Short Run 159
8-6b Diminishing Returns and the Shape of the Cost Curves 161
8-7 Output and Costs in the Long Run 163
8-7a Economies and Diseconomies of Scale 163
8-7b Alternative Shapes of the LRATC 166
8-8 What Factors Cause Cost Curves to Shift? 167
8-8a Prices of Resources 167
8-8b Taxes 168
8-8c Regulations 168
8-8d Technology 168
8-9 The Economic Way of Thinking about Costs 168
8-9a What Are Sunk Costs? 168
8-9b How Will Cost Influence Supply? 170
Looking Ahead 170
Key Points 171
Critical Analysis Questions 171

Chapter 9 Price Takers and the Competitive Process 173

9-1 Price Takers and Price Searchers 174
9-2 What Are the Characteristics of Price-Taker Markets? 174
9-3 How Does the Price Taker Maximize Profit? 176
9-3a Profit Maximizing—A Numeric Example 177
9-3b Losses and When to Go Out of Business 178
9-4 The Firm’s Short-Run Supply Curve 180
9-5 The Short-Run Market Supply Curve 181
9-6 Price and Output in Price-Taker Markets 181
9-6a Long-Run Equilibrium 182
9-6b How Will the Market Respond to an Increase in Demand? 183
9-6c How Will the Market Respond to a Decrease in Demand? 184
9-6d The Long-Run Market Supply Curve 185
9-6e Supply Elasticity and the Role of Time 186
9-7 The Role of Profits and Losses 187
9-8 Competition Promotes Prosperity 188
Looking Ahead 189
Key Points 190
Critical Analysis Questions 190

Chapter 10 Price-Searcher Markets with Low Entry Barriers 193

10-1 Competitive Price-Searcher Markets 194
10-1a Price and Output in Competitive Price-Searcher Markets 194
10-2 Contestable Markets and the Competitive Process 197
10-3 Evaluating Competitive Price-Searcher Markets 198
10-4 A Special Case: Price Discrimination 200
10-5 Entrepreneurship and Economic Progress 202
10-5a Dynamic Competition, Innovation, and Business Failures 205
Looking Ahead 207
Key Points 208
Critical Analysis Questions 208

Chapter 11 Price-Searcher Markets with High Entry Barriers 211

11-1 Why Are Entry Barriers Sometimes High? 212
11-1a Economies of Scale 212
11-1b Government Licensing and Other Legal Barriers to Entry 212
11-1c Patents 213
11-1d Control Over an Essential Resource 213
11-2 Characteristics of a Monopoly 213
11-2a Price and Output under Monopoly 214

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x CONTENTS

11-3 The Characteristics of an Oligopoly 217

11-3a Interdependence among Oligopolistic Firms 217
11-3b Substantial Economies of Scale 217
11-3c Significant Barriers to Entry 218
11-3d Identical or Differentiated Products 218
11-4 Price and Output under Oligopoly 218
11-4a The Incentive to Collude . . . and to Cheat 219
11-4b Obstacles to Collusion 221
11-4c Uncertainty and Oligopoly 222
11-5 Market Power and Profit—The Early Bird Catches the Worm 224
11-6 Defects of Markets with High Entry Barriers 224
11-7 Policy Alternatives When Entry Barriers Are High 225
11-7a Antitrust Policy and Controlling the Structure of an Industry 225
11-7b Reduce Artificial Barriers to Trade 226
11-7c Regulate the Price 226
11-7d Problems with Regulation 227
11-7e Supply Market with Government Production 230
11-7f Pulling It Together 230
11-8 The Competitive Process in the Real World 231
Looking Ahead 231
Key Points 232
Critical Analysis Questions 232

Chapter 12 The Supply of and Demand for Productive Resources 234

12-1 Human and Nonhuman Resources 236
12-2 The Demand for Resources 236
12-2a Substitution in Production 237
12-2b Substitution in Consumption 237
12-2c How Time Changes the Demand for Resources 238
12-2d Shifts in the Demand for a Resource 238
12-3 Marginal Productivity and the Firm’s Hiring Decision 240
12-3a Using a Variable Resource with a Fixed Resource 240
12-3b MRP and the Firm’s Demand Curve for a Resource 242
12-3c Multiple Resources and How Much to Use of Each 242
12-3d Maximizing Profits When Multiple Resources Are Used 243
12-3e Cost Minimization When Multiple Resources Are Used 243
12-4 The Supply of Resources 244
12-4a Short-Run versus Long-Run Resource Supply 245
12-4b Short-Run Supply 246
12-4c Long-Run Supply 247
12-5 Supply, Demand, and Resource Prices 247
12-5a The Coordinating Function of Resource Prices 248
Looking Ahead 250
Key Points 250
Critical Analysis Questions 250

Chapter 13 Earnings, Productivity, and the Job Market 252

13-1 Why Do Earnings Differ? 253
13-1a Earnings Differentials Due to Nonidentical Workers 253
13-1b Earnings Differentials Due to Nonidentical Jobs 258
13-1c Earnings Differentials Due to the Immobility of Labor 258
13-1d Sources of Wage Differentials: A Summary 259
13-2 The Economics of Employment Discrimination 261
13-2a How Much Impact Does Employment Discrimination Have on Earnings? 262
13-3 The Link between Productivity and Earnings 263
13-3a Productivity and Compensation: Measurement Problems 264
Looking Ahead 267
Key Points 267
Critical Analysis Questions 267

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 CONTENTS xi

Chapter 14 Investment, the Capital Market, and the Wealth of Nations 269
14-1 Why People Invest 270
14-2 Interest Rates 271
14-2a How Interest Rates Are Determined 271
14-2b The Money Rate versus the Real Rate of Interest 273
14-2c Interest Rates and Risk 273
14-3 The Present Value of Future Income and Costs 274
14-4 Present Value, Profitability, and Investment 276
14-4a Expected Future Earnings, The Interest Rate, and Asset Values 277
14-4b Investors and Corporate Investments 277
14-5 Investing in Human Capital 278
14-6 Uncertainty, Entrepreneurship, and Profit 279
14-6a Returns to Physical and Human Capital 281
14-7 Why Is the Capital Market So Important? 282
Looking Ahead 284
Key Points 284
Critical Analysis Questions 285

Chapter 15 Income Inequality and Poverty 286

15-1 How Much Income Inequality Exists in the United States? 287
15-1a The Factors Affecting Income Distribution 288
15-1b Why Has Income Inequality Increased? 291
15-2 Income Mobility and Inequality in Economic Status 292
15-3 Poverty in the United States 294
15-3a Transfer Payments and the Poverty Rate 295
15-3b Why Haven’t Anti-Poverty Programs Been More Effective? 297
15-3c Estimating the Costs of Redistribution 299
15-4 Income Inequality: Some Concluding Thoughts 299
Looking Ahead 302
Key Points 302
Critical Analysis Questions 302

Part 4 International Economics 305

Chapter 16 Gaining from International Trade 306
16-1 The Trade Sector of the United States 307
16-2 Gains from Specialization and Trade 308
16-2a How Trade Expands Consumption Possibilities 310
16-2b Some Real-World Considerations 312
16-3 Supply, Demand, and International Trade 314
16-4 The Economics of Trade Restrictions 316
16-4a The Economics of Tariffs 316
16-4b The Economics of Quotas 317
16-4c Exchange Rate Controls as a Trade Restriction 319
16-5 Why Do Nations Adopt Trade Restrictions? 319
16-5a The National-Defense Argument 319
16-5b The Infant-Industry Argument 320
16-5c The Antidumping Argument 320
16-5d Special Interests and the Politics of Trade Restrictions 320
16-6 Trade Barriers and Popular Trade Fallacies 323
16-6a Trade Fallacy 1: Trade Restrictions that Limit Imports Save Jobs and Expand Employment 323
16-6b Trade Fallacy 2: Free Trade with Low-Wage Countries Like Mexico and China will Reduce
the Wages of Americans 324
16-7 Institutions and the Changing Nature of Global Trade 325
Looking Ahead 326
Key Points 326
Critical Analysis Questions 327

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xii CONTENTS

Part 5 Applying the Basics: Special Topics in Economics 329

Special Topic 1: Government Spending and Taxation 330
Special Topic 2: The Economics of Social Security 345
Special Topic 3: The Stock Market: Its Function, Performance, and Potential
as an Investment Opportunity 355
Special Topic 4: Keynes and Hayek: Contrasting Views on Sound Economics
and the Role of Government 365
Special Topic 5: The Great Recession of 2008–2009: Causes and Response 371
Special Topic 6: Lessons from the Great Depression 386
Special Topic 7: The Economics of Health Care 400
Special Topic 8: Earnings Differences between Men and Women 413
Special Topic 9: Do Labor Unions Increase the Wages of Workers? 420
Special Topic 10: The Question of Resource Exhaustion 431
Special Topic 11: Difficult Environmental Cases and the Role of Government 442

Appendix A General Business and Economics Indicators for the United States 451
Appendix B Answers to Selected Critical Analysis Questions 458

Glossary 470
Index 477

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RELATIONSHIP BETWEEN MAIN EDITION AND THE MACRO/MICRO EDITIONS
In addition to the full length text, Microeconomic and Macroeconomic splits of this text are also available.
The chapters and special topics covered by the micro and macro split versions are indicated in this table.

Chapters
ECONOMICS MICROECONOMICS MACROECONOMICS
1 1 1 The Economic Approach
2 2 2 Some Tools of the Economist
3 3 3 Demand, Supply, and the Market Process
4 4 4 Demand and Supply: Applications and Extensions
5 5 5 Difficult Cases for the Market, and the Role of
Government
6 6 6 The Economics of Political Action
7 7 Taking the Nation’s Economic Pulse
8 8 Economic Fluctuations, Unemployment, and Inflation
9 9 An Introduction to Basic Macroeconomic Markets
10 10 Dynamic Change, Economic Fluctuations, and the
AD–AS Model
11 11 Fiscal Policy: The Keynesian View and the Historical
Development of Macroeconomics
12 12 Fiscal Policy, Incentives, and Secondary Effects
13 13 Money and the Banking System
14 14 Modern Macroeconomics and Monetary Policy
15 15 Macroeconomic Policy, Economic Stability, and the Fed-
eral Debt
16 16 Creating an Environment for Growth and Prosperity
17 17 Institutions, Policies, and Cross-Country Differences in
Income and Growth
18 16 18 Gaining from International Trade
19 19 International Finance and the Foreign Exchange Market
20 7 Consumer Choice and Elasticity
21 8 Costs and the Supply of Goods
22 9 Price Takers and the Competitive Process
23 10 Price-Searcher Markets with Low Entry Barriers
24 11 Price-Searcher Markets with High Entry Barriers
25 12 The Supply of and Demand for Productive Resources
26 13 Earnings, Productivity, and the Job Market
27 14 Investment, the Capital Market, and the Wealth of Nations
28 15 Income Inequality and Poverty

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SPECIAL TOPICS

ECONOMICS MICROECONOMICS MACROECONOMICS TOPIC TITLE

1 1 1 Government Spending and Taxation
2 2 2 The Economics of Social Security
3 3 3 The Stock Market: Its Function, Performance, and
Potential as an Investment Opportunity
4 4 4 Keynes and Hayek: Contrasting Views on Sound
Economics and the Role of Government
5 5 5 The Great Recession of 2008–2009: Causes and
Response
6 6 6 Lessons from the Great Depression
7 7 The Economics of Health Care
8 8 Earnings Differences between Men and Women
9 9 Do Labor Unions Increase the Wages of Workers?
10 10 The Question of Resource Exhaustion
11 11 Difficult Environmental Cases and the Role of
Government

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PREFACE

These are interesting times. In many ways, they are characterized by uncertainties, para-
doxes, and contradictions. Technology has dramatically increased the speed and reduced
the cost of information, communication, and transportation. But, has this improved our
well-being or merely turned our lives into meaningless rat races? Why do people feel so
insecure even though their incomes are at historic highs? Is government indebtedness, in-
cluding that of the federal government of the United States, a time bomb that will soon
explode and wreck our economic future? Why are interest rates so low, and will the current
era of low interest rates continue? Does international trade elevate our living standards,
or is cheap foreign labor impoverishing American workers? These are vitally important
questions. This text addresses all of them and provides insights that will enhance your
understanding of these critical issues.
Beginning with the first edition 40 years ago, our goal has been to use the tools of
economics to explain how the real world works and to do so in a clear and understandable
manner. Perhaps more than ever before, students are seeking to make sense of the world in
which they live. This thought was constantly on our minds as we worked on this edition.
We have always used the tools of economics to analyze the operation of both the mar-
ket and political processes. We are aware that some economists merely analyze the failures
of markets and focus on how various idealized policy responses might improve economic
efficiency, ignoring the insights of economics about the operation of the political process.
We believe this approach is naïve and that it serves students poorly. Idealized alternatives
are never an option. Instead, the relevant options are about market allocation versus politi-
cal allocation. Economics reveals a great deal about the operation of both. If we are go-
ing to provide students with insight about the real world, the tools of economics must be
applied to both market and political allocation.

ORGANIZATION AND INSTRUCTOR

FLEXIBILITY
The organization of Microeconomics: Private and Public Choice is designed to provide
instructors with maximum flexibility. As in recent editions, the text is divided into core
chapters and a concluding special topics section. The 16 core chapters cover all of the
material taught in most principles courses, and they are presented in the usual manner. Ex-
amples and data from the real world are used to reinforce the analysis. In addition, “Beyond
the Basics” includes 11 relatively short special topic applications on high-profile topics
such as Social Security, the Great Recession of 2008, the economics of health care, and
environmental quality. Also included in this section are applications that address questions
such as these: “What caused the Great Depression?” “Is discrimination responsible for the
earnings differences between men and women?” and “Are we running out of resources?”
These features will grab the interest of students and are short enough to cover during a
single class period. If you have not integrated the special topic materials into your course,
please consider doing so. They will enrich your course and help students better understand
the political economy debates that dominate the daily news of our world.
Instructors integrating public choice throughout their course will probably want to
cover Chapters 5 and 6 before moving to the core micro material. Others may want to jump
from Chapter 4 directly to the core micro chapters. The chapters have been written so that
any of these options will work.
As in the past edition, we worked hard to reduce the length of the text. Several adden-
dums included in past editions have been deleted, but they have been updated in the format
of this edition and are available on the open access student Web site. These include the
xv
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xvi PREFACE

following: “Incentives and Economic Organization: Who Produces, Who Pays, and Why It
Matters” (addendum to Chapter 6) and “Consumer Choice and Indifference Curves” (ad-
dendum to Chapter 7). These materials are available to students on the open access Web
site for the text. Thus, instructors can freely assign them if they would like to do so.

NEW MATERIAL IN THIS EDITION

New material designed to enliven economics and illustrate its relevance has been integrated
in just about every chapter. Following are several of these additions:
• In Chapter 4, the analysis of the minimum wage has been revised and material on city
minimum wages has been added.
• In Chapter 6, the cases of Uber versus the taxi industry and of Tesla versus the auto
dealers are used to illustrate the tendency of the political process to favor older, more
established businesses relative to innovative start-up firms seeking to enter the market.
• Chapter 10 contains a new application, “How Technology Is Increasing Dynamic Com-
petition,” that highlights the impact of technological advances that have reduced search
and transaction costs on the competitiveness of markets.
• Chapter 13 contains a new application, “How Does Occupational Licensing Influence
Labor Markets?” The feature shows that the share of persons employed in jobs requiring
a license has soared during the past half-century.
• In Chapter 15 the section on why anti-poverty programs have not been more effective
has been expanded and recent data from the Congressional Budget Office on the implicit
marginal tax rates faced by those with low and moderate incomes (Exhibit 6) has been
incorporated into the analysis.

ADDITIONAL TEXT FEATURES

Economics: Private and Public Choice retains several features that make the presentation
of economics both more interesting and understandable.
• Keys to Economic Prosperity. Students often fail to appreciate the organizational and
institutional factors that are the foundation for economic progress. To help remedy this
situation, we have incorporated a “Keys to Economic Prosperity” feature that highlights
the importance of factors like gains from trade, secure property rights, competition, and
free trade as sources of economic prosperity. In all, 12 key factors that underlie modern
economic prosperity are highlighted at appropriate places throughout the text; they also
are listed inside the front cover.
• Applications in Economics. “Applications in Economics” boxes apply economic theory
to real-world issues and controversies. These features illustrate the importance and pow-
er of the principles covered in the text.
• Measures of Economic Activity. The “Measures of Economic Activity” boxes explain
how important economic indicators such as the unemployment rate and the index of
leading indicators are assembled and what they mean.
• Outstanding Economists. Boxes throughout the text highlight the lives of major econo-
mists and focus on how their work has contributed to the development of economics.
• Myths of Economics. These boxed articles dispel commonly held fallacies of economic rea-
soning. Because they are tomorrow’s leaders, we believe that all students should be aware
of common economic misperceptions that tend to hamper a nation’s economic progress.
• Chapter Focus Questions and Closing Key Point Summaries. Each chapter begins with
four or five questions that summarize the focus of the chapter. At the end of each chap-
ter, the Key Points section provides students with a concise statement of the material
covered in the chapter (the chapter learning objectives). These two features help stu-
dents better integrate the material into the broader economic picture.
• Critical Analysis Questions. Each chapter concludes with a set of discussion questions
and problems designed to test students’ ability to analyze economic issues and to apply

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 PREFACE xvii

economic theory to real-world events. Appendix B at the end of the text contains sug-
gested answers for approximately half of these questions.
• Graphing at a Glance. New Graphing at a Glance video tutorials enhance the learning
experience by bringing graphs to life, allowing students to see graphs physically move
along the axes.
• ConceptClips. New ConceptClips in the interactive eReader address the challenge of
understanding economics terminology that students face when first introduced to the
subject matter.

SUPPLEMENTARY MATERIALS
The text is accompanied by a robust set of online learning tools designed to support your
classroom work. Aplia and MindTap include real-time, interactive tutorials; online experi-
ments; Graph Builder; Adaptive Test Prep; Graphing at a Glance; ConceptClips; Audio
Cases with assessments; Concept & Application Videos; automatically graded quizzes; and
automatically graded problem sets. Likewise, the book’s dynamic PowerPoint presenta-
tion—considered by many to be the best in the principles market—has been further en-
hanced with multimedia to facilitate your teaching.

FOR THE STUDENT

MindTap MindTap is a fully online, highly personalized learning experience built on
Cengage Learning content that combines student learning tools—readings, multimedia,
activities, and assessments—into a singular Learning Path that guides students through
their course.

Product Support (www.cengagebrain.com) Valuable resources can be found

on the text’s Internet support site. Students will find an interactive study center with access
to various tools.

FOR THE INSTRUCTOR

We are sure that many of the features incorporated with this textbook will help you become
a better teacher and make your classes more interesting to students. Personally, we have
incorporated the Keys to Economic Prosperity series, economics video clips, homework
assignments, and online quiz questions into our own classes with great success. The full set
of supplements that can accompany the book include the following:

MindTap MindTap is a fully online, highly personalized learning experience built on

Cengage Learning content that combines student learning tools—readings, multimedia,
activities, and assessments—into a singular Learning Path that guides students through
their course. Instructors personalize the experience by customizing authoritative Cengage
Learning content and learning tools, including the ability to add their own content in the
Learning Path via apps that integrate into the MindTap framework seamlessly with Learn-
ing Management Systems.

Aplia Aplia™ is an online interactive learning solution that improves comprehension and
outcomes by increasing student effort and engagement. Founded by a professor to enhance
his own courses, Aplia provides automatically graded assignments that were written to make
the most of the Web medium and contains detailed, immediate explanations on every ques-
tion. Aplia is available in more than 15 disciplines and has been used by more than 2 million
students at more than 1,800 institutions. Visit www.aplia.com/economics/ for more details.

Write Experience This technology product allows you to assess written communi-
cation skills without adding to your workload. Instructors in all areas have told us that

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xviii PREFACE

students need to be able to write effectively in order to communicate and think critically.
Through an exclusive partnership with a technology company, Cengage Learning’s Write
Experience allows you to do just that! This new product utilizes artificial intelligence not
only to score student writing instantly and accurately but also to provide students with
detailed revision goals and feedback on their writing to help them improve. Write Experi-
ence is the first product designed and created specifically for the higher education market
through an exclusive agreement with McCann Associates and powered by e-Write Intel-
liMetric Within™. IntelliMetric is the gold standard for automated scoring of writing and
is used to score the Graduate Management Admissions Test® (GMAT®) analytical writing
assessment. Better Writing. Better Outcomes. Write Experience. Visit www.cengage.com/
writeexperience to learn more.

Student Engagement Analytics in Progress App via MindTap How do

you know students have read the material or viewed the resources you’ve assigned? How
can you tell if students are struggling with a concept? Engagement Tracker assesses student
preparation and engagement. Use the tracking tools to see progress for the class as a whole
or for individual students. Identify students at risk early in the course. Uncover those con-
cepts that are most difficult for your class. Monitor time on task. Keep students engaged.

Interactive eBook In addition to interactive teaching and learning tools, Economic

MindTap includes an interactive eBook. Students can take notes, highlight, search, and
interact with embedded media specific to their book. Use it as a supplement to the printed
text or as a substitute—with MindTap, the choice is up to your students.

Test Banks The test banks for the 16th edition were prepared by the author team with
the assistance of Joe Calhoun. The authors have worked hard to update and improve the
test banks for this edition. The three test banks contain approximately 7,000 questions—
multiple choice and short answer. Within each chapter, the questions correspond to the
major subheadings of the text. The first ten questions of each chapter are suitable for use
as a comprehensive quiz covering the material of the chapter. Instructors who want to mo-
tivate their students to study will find online practice quizzes on MindTap that can easily
be incorporated into their quizzes and exams. The cloud-based test banks for this edition
have been enhanced significantly. Cognero contains all of the questions in the test bank so
that you can create and customize tests in minutes. You can easily edit and import your own
questions and graphics and edit and maneuver existing questions.

PowerPoint We believe our PowerPoint presentation, prepared by Joseph Connors of

Florida Southern University, is the best you will find in the principles market. The presen-
tation includes chapter-by-chapter lecture notes with fully animated, hyperlinked slides of
the textbook’s exhibits. Its dynamic graphs and accompanying captions make it easy for
instructors to present (and students to follow) sequential changes. The graphs are also used
to highlight various relationships among economic variables. To facilitate classroom dis-
cussion and interaction, questions are strategically interspersed throughout the PowerPoint
slides to help students develop the economic way of thinking. Instructions explaining how
professors can easily add, delete, and modify slides in order to tailor the presentation to
their liking are included. If instructors want to make the PowerPoint presentation available
to students, they can place it on their Web site (or the site for their course).

Instructor’s Manual The Instructor’s Manual was prepared by coauthor David

Macpherson. It contains special sections for Advanced Placement instructors prepared by
James Chasey and Francis McMann, two of the nation’s leading AP instructors. Informa-
tion on how to use and modify the PowerPoint material is contained in the front of the In-
structor’s Manual. The manual is divided by chapters, and each chapter is divided into three
parts. The first part consists of a detailed chapter outline in lecture-note form. It is designed
to help instructors organize their notes to match the 16th edition of the book. Instructors
can easily prepare detailed, personalized notes by revising the downloadable lecture notes
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
 PREFACE xix

on the book companion Web site that they access through www.cengage.com. The second
part of each chapter contains teaching tips, sources of supplementary materials, and other
helpful information. Part 3 of each chapter consists of in-class economic games and experi-
ments. Contributed in part by Professor Charles Stull of Kalamazoo College, the games are
popular with many instructors. We hope you will try them.
The book companion Web site contains the key supplements designed to aid instruc-
tors, including the content from the Instructor’s Manual, test banks, and PowerPoint lecture
and exhibit slides for overhead use.

Instructor Resource Center (www.login.cengage.com) This password-

protected Web site includes instructor’s manuals and test banks and the PowerPoint lecture
and exhibit slides. To download these supplements, register online at www.login.cengage.com.

A NOTE TO INSTRUCTORS
As we try to improve the book from one edition to the next, we rely heavily on our ex-
periences as teachers. But our experience using the book is minuscule compared to that
of the hundreds of instructors who use it nationwide. If you encounter problems or have
suggestions for improving the book, we urge you to let us know by writing to us in care of
Cengage Learning, 5191 Natorp Blvd., Mason, OH 45040.

A NOTE TO STUDENTS
This textbook contains several features we think will help you maximize (a good economic
term) the returns of your study efforts. Here are some of the things that will help you and a
few tips for making the most of them.
• Each chapter begins with a series of focus questions that communicate the central issues
of the chapter. Before you read the chapter, briefly think about the focus questions, why
they are important, and how they relate to the material in prior chapters.
• The textbook is organized in the form of an outline. The headings within the text (in
red) are the major points of the outline. Minor headings are subpoints under the major
headings. In addition, important subpoints within sections are often set off and num-
bered. Bold italicized type is used to highlight material that is particularly important.
Sometimes “thumbnail sketches” are included to recap material and help you keep the
important points mentally organized.
• A “Key Points” summary appears at the end of each chapter. Use the summary as a
checklist to determine whether you understand the major points of the chapter.
• A review of the exhibits and illustrative pictures will also provide you with a summary
of the key points of each chapter. The accompanying captions briefly describe the eco-
nomic phenomena illustrated by the exhibits.
• The key terms introduced in each chapter are defined in the margins. As you study the
chapter, review the marginal definition of each key term as it is introduced. Later, you
also may find it useful to review the marginal definitions. If you have forgotten the
meaning of a term introduced earlier, consult the glossary at the end of the book.
• The boxed features go into more depth on various topics without disrupting the flow
of the text. In general, the topics of the boxed features have been chosen because they
are a good application of the theory described in the book or because students tend to
be interested in them. The boxed features supplement the text and will enhance your
understanding of important economic concepts.
• The critical analysis questions at the end of each chapter are intended to test your un-
derstanding of the economic way of thinking. Answering these questions and solving
the problems will greatly enhance your knowledge of the material. Answers to approxi-
mately half of these questions are provided in Appendix B.
If you need more practice, ask your professor about Aplia and MindTap.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
 ACKNOWLEDGMENTS

A project of this magnitude is a team effort. Through the years, numerous people have as-
sisted us in various ways. We are also very much indebted to the excellent team of profes-
sionals at Cengage Learning, including Michael Parthenakis, Senior Product Manager, for
his help and support of our efforts; Chris Rader, Content Developer, for his commitment
to the development of the project and for keeping it on schedule; Colleen Farmer, Senior
Content Project Manager, for orchestrating the copyediting, proofreading, layout, and in-
dexing; Jennifer Bowes, Intellectual Property Analyst, who helped us locate and obtain
permissions for the many photos; and John Carey, Marketing Manager, who worked hard
to inform the marketplace about the advantages of the book.
Jane Shaw Stroup, Signè Thomas, and Amy Gwartney assisted us with the review
and proofing of this edition. Daniel Bennett, Joab Corey, Joe Connors, Joe Calhoun, and
Tawni Ferrarini provided us with valuable suggestions for improving the text and assis-
tance with supplementary materials. Robert Lawson of Southern Methodist University and
Hugo Moises Montesinos Yufa of Florida State University assisted us with the preparation
of several exhibits. The text still bears an imprint of the contributions of Woody Studen-
mund of Occidental College and Gary Galles of Pepperdine University, who assisted us in
numerous ways with past editions.
We have often revised material in light of suggestions made by reviewers, users,
friends, and even a few competitors. In this regard, we would like to express our apprecia-
tion to the following people for their reviews and helpful suggestions for recent editions:
Pete Calcagno, College of Charleston; Joseph Calhoun, Florida State University;
Cathy Carey, Bowling Green University; Lee Coppock, University of Virginia; Hugo Faría,
University of Miami; Tawni Ferrerini, Northern Michigan University; Burton Folsom,
Hillsdale College; Seth Gershenson, Michigan State University; Monica Greer, Bellarm-
ine University; Michael Hammock, Florida State University; Robert Higgs, Independent
Institute; John Hilston, Eastern Florida State College; Randall Holcombe, Florida State
University; Aaron Lowen, Grand Valley State University; Lynn MacDonald, St. Cloud
State University; Thomas McCaleb, Florida State University; Barbara Moore, University
of Central Florida; Mark Perry, University of Michigan–Flint; Ivan Pongracic, Hillsdale
College; Gerry Simons, Grand Valley State University; and Carol Sweeney, Florida Gulf
Coast University.
Through the years, many other instructors have provided us with insightful comments
and constructive suggestions. We would like to express our appreciation to the following:
Steve Abid, Grand Rapids Community College; Douglas Agbetsiafa, Indiana University,
South Bend; James C. W. Ahiakpor, California State University, Hayward; Ali T. Akar-
ca, University of Illinois at Chicago; Ryan C. Amacher, University of Texas at Arlington;
Stephen A. Baker, Capital University; Bharati Basu, Central Michigan University; Don
Bellante, University of South Florida; Jennis Biser, Austin Peay State University; Don-
ald Boudreaux, George Mason University; George Bowling, St. Charles Community Col-
lege; Robert Brittingham, Christian Brothers University; Byron Brown, Michigan State
University; James Bryan, Manhattanville College; Kathy Clark, Florida Southwestern
State College; Mike Cohick, Collin County Community College; David S. Collins, Vir-
ginia Highlands Community College; Steven R. Cunningham, University of Connecticut;
Jeff Edwards, Lone Star College–CyFair; Ann Eike, University of Kentucky; Christina Es-
quivel, McLennan Community College; Robert C. Eyler, Sonoma State University; James
R. Fain, Oklahoma State University; Andrew W. Foshee, McNeese State University; Mark
Funk, University of Arkansas at Little Rock; Gary Galles, Pepperdine University; Marsha
Goldfarb, University of Maryland Baltimore County; Richard Gosselin, Houston Com-
munity College; Darrin Gulla, University of Kentucky; Barry Haworth, University
of Louisville; Ronald Helgens, Golden Gate University; Robert E. Herman, Nassau
xx
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 ACKNOWLEDGMENTS xxi

Community College/SUNY; William D. Hermann, Golden Gate University, San Fran-

cisco; Rey Hernandez, Metropolitan State College of Denver; Brad Hobbs, Florida Gulf
Coast University; Randall Holcombe, Florida State University; Jim Hubert, Seattle Cen-
tral Community College; Katherine Huger, Charleston Southern University; Woodrow
W. Hughes, Jr., Converse College; Jeffrey Rogers Hummel, San Jose State University;
Tom Jeitschko, Michigan State University; Rob H. Kamery, Christian Brothers Univer-
sity; Derek Kellenberg, University of Montana; Robert Kling, Colorado State University;
Frederic R. Kolb, University of Wisconsin–Eau Claire; Barbara Kouskoulas, Lawrence
Technological University; Cory Krupp, Duke University; Jean Kujawa, Lourdes Univer-
sity; Randy W. LaHote, Washtenaw Community College; John Larrivee, Mount St. Mary’s
University; Robert Lawson, Southern Methodist University; Don R. Leet, California
State University, Fresno; Joe LeVesque, Northwood University; Andrew T. Light, Liberty
University; Edward J. López, Western Carolina University; Dale Matcheck, Northwood
University; G. Dirk Mateer, University of Arizona; John McArthur, Wofford College; Da-
vid M. Mitchell, Missouri State University; Hadley Mitchell, Taylor University; Glen A.
Moots, Northwood University; Debasri Mukherjee, Western Michigan University; Todd
Myers, Grossmont College; Jennifer Pate, Loyola Marymount University; Lloyd Orr, In-
diana University, Bloomington; Judd W. Patton, Bellevue University; James Payne, Uni-
versity of New Orleans; Dennis Pearson, Austin Peay State University; Claudiney Pereira,
Arizona State University; Jack Phelan, University of New Haven; Jennifer Platania, Elon
University; Robert C. Rencher, Jr., Liberty University; Dan Rickman, Oklahoma State
University; Karin L. Russell, Keiser University; Allen Sanderson, University of Chicago;
Thomas W. Secrest, USC Coastal Carolina; Tim Shaugnessey, Louisiana State University–
Shreveport; Gerald Simons, Grand Valley State University; Charles D. Skipton, University
of New Haven; Marcia Snyder, College of Charleston; John Solow, University of Iowa;
Ken Somppi, Southern Union State Community College; John Sophocleus, Auburn; Joe
Stevano, Coker College; Edward Stringham, Texas Tech University; David Switzer, St.
Cloud State University; Alex Tokarev, Northwood University; Richard D.C. Trainer, War-
saw School of Economics; Bich Tran, San Jacinto College; Scott Ward, Trevecca Nazarene
University; Christopher Westley, Florida Gulf Coast University; David Wharton, Washing-
ton College; Mark Wheeler, Western Michigan University; Edward Wolpert, University of
Central Florida; and Janice Yee, Worcester State University.

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 ABOUT THE AUTHORS

James D. Gwartney is a professor of Economics at Florida State University, where

he holds the Gus A. Stavros Eminent Scholar Chair of Economic Education. He is also
the coauthor of the annual report Economic Freedom of the World, which provides infor-
mation on the consistency of institutions and policies with economic freedom for more
than 150 countries. His publications have appeared in scholarly journals, including the
American Economic Review, Journal of Political Economy, Journal of Economic Educa-
tion, Southern Economic Journal, and Journal of Institutional and Theoretical Economics.
During 1999–2000, he served as Chief Economist of the Joint Economic Committee of the
U. S. Congress. He is a past president of the Southern Economic Association and the As-
sociation of Private Enterprise Education. His Ph.D. in economics is from the University
of Washington.

Richard L. Stroup is Professor Emeritus of economics at Montana State University

and Professor Emeritus of economics at North Carolina State University. His Ph.D. is from
the University of Washington. From 1982–1984, he served as Director of the Office of
Policy Analysis at the U.S. Department of the Interior. Stroup has published and spoken
on global warming, land use regulation, archaeology, and needed environmental policy
improvements. His research helped to develop the approach known as free market envi-
ronmentalism. His book Eco-nomics: What Everyone Should Know About Economics and
the Environment (Washington: Cato Institute, 2016), was sponsored by the Property and
Environment Research Center, of which he is a cofounder.

Russell S. Sobel earned his Ph.D. in economics from Florida State University in 1994.
He has published more than 200 books and articles and has received national recognition
for his works on entrepreneurship and FEMA reform. He serves on the editorial board for
three academic journals and on the advisory board for four university centers. He has won
numerous awards for his teaching as well as his research. He regularly teaches courses in
principles of economics and public economics and gives lectures at economic education
outreach programs. He is a professor of Economics and Entrepreneurship at The Citadel.

David A. Macpherson is the E.M. Stevens Professor of Economics and Economics

Department Chair at Trinity University. Previously, he was Director of the Pepper Institute
on Aging and Public Policy and the Rod and Hope Brim Eminent Scholar of Economics at
Florida State University, where he received two university-wide awards for teaching excel-
lence. His research has focused on applied economics, including real estate markets, analy-
sis of pension funds, discrimination, industry deregulation, labor unions, and the minimum
wage. He has published 65 articles in leading economics and real estate journals, including
Review of Economics and Statistics, Industrial and Labor Relations Review, Journal of
Labor Economics, Journal of Human Resources, and Journal of Real Estate Finance and
Economics. His research has been funded by a variety of entities, including the National
Science Foundation, Florida Legislature, and National Association of Realtors. He is also
coauthor of Contemporary Labor Economics, 11th edition, as well as the annual Union
Membership and Earnings Data Book: Compilations from the Current Population Survey.
His specialty is applied labor economics. His undergraduate and doctoral degrees are from
Pennsylvania State University.

xxii
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PAR T 1

The Economic Way of Thinking

Life is a series of choices

Economics is about how people choose. The choices transportation are constantly altering the attrac-
we make influence our lives and those of others. tiveness of various options and the opportunities
Your future will be influenced by the choices you available to us. The economic way of thinking is
make with regard to education, job opportunities, all about how incentives alter the choices people
savings, and investment. Furthermore, changes in make. It can help you make better choices and en-
technology, demographics, communications, and hance your understanding of our dynamic world.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 1

The Economic Approach

FOCUS
• What is scarcity, and why is it important even • What is the economic way of thinking? What
in relatively wealthy economies? is different about the way economists look at
• How does scarcity differ from poverty? Why choices and human decision-making?
does scarcity necessitate rationing and cause • What is the difference between positive and
competition? normative economics?

Economist, n.–A scoundrel whose faulty vision sees things as they really are, not as they ought
to be. —Daniel K. Benjamin, after Ambrose Bierce

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
 Welcome to the world of economics. country if we do not get it under control. The Chinese
In recent years, economics has often and Mexicans are stealing our jobs and paralyzing
been front-page news, and it affects our economy. Budget deficits stimulate the economy
all of our lives. The boom and bust and promote employment. A higher minimum wage
of the housing market, the recession will help the poor. Making college tuition free for all
of 2008 and the slow recovery, inter
inter- will promote economic growth and lead to higher
est rates near zero, a volatile stock market, falling oil earnings. Are these statements true? This course will
and gasoline prices, the soaring costs of a college edu- provide you with knowledge that will enhance your
cation and poor job opportunities for graduates—all understanding of issues like these and numerous oth-
of these have been in the news and have turned the ers. It may even alter the way you think about them.
lives of many American upside down. Economics will The origins of economics date back to Adam Smith,
enhance your understanding of all of these topics and a Scottish moral philosopher, who expressed the first
many more. You will soon see that economics is about economic ideas in his breakthrough book, An Inquiry
much more than just financial markets and economic into the Nature and Causes of the Wealth of Nations,
policy. In fact, a field trip to the fruits and vegetables published in 1776. As the title of his book suggests,
section at your local grocery store could well be filled Smith sought to explain why people in some nations
with more economics lessons than a trip to the New were wealthier than those in others. This very question
York Stock Exchange. is still a central issue in economics. It is so important
In a nutshell, economics is the study of human be- that throughout this book we will use a special “Keys
havior, with a particular focus on human decision-making. to Economic Prosperity” symbol in the margin to
It will introduce you to a new and powerful way of think- highlight sections that focus on this topic. A listing of
ing that will both help you make better decisions and the major keys to prosperity is presented inside the
enhance your understanding of how the world works. front cover of the book. These keys and accompanying
You may have heard some of the following state- discussions will help you understand what factors en-
ments: The soaring federal debt is mortgaging the able economies, and their citizens, to grow wealthier
future of our grandchildren, and it will bankrupt the and prosper.

Outstanding Economist: The Importance of

Adam Smith, the Father of Economic Science
Economics is a relatively young science. The foundation of economics was laid in 1776, when
©Bettmann/CORBIS

Adam Smith (1723–1790) published An Inquiry into the Nature and Causes of the Wealth of
Nations.
Smith was a lecturer at the University of Glasgow, in his native Scotland. Before economics,
morals and ethics were actually his concern. His first book was The Theory of Moral Sentiments.
For Smith, self-interest and sympathy for others were complementary. However, he did not believe that charity alone
would provide the essentials for a good life.
Smith stressed that free exchange and competitive markets would harness self-interest as a creative force. He be-
lieved that individuals pursuing their own interests would be directed by the “invisible hand” of market prices toward
the production of those goods that were most advantageous to society. He argued that the wealth of a nation does
not lie in gold and silver, but rather in the goods and services produced and consumed by people. According to Smith,
competitive markets would lead to coordination, order, and efficiency without the direction of a central authority.
These were revolutionary ideas at the time, but they had consequences. Smith’s ideas greatly influenced not only
Europeans but also those who developed the political economy structure of the United States. Further, Smith’s notion
of the “invisible hand” of the market continues to enhance our understanding of why some nations prosper while
others stagnate.1
1
For an excellent biographical sketch of Adam Smith, see David Henderson, ed., The Fortune Encyclopedia of Economics (New York: Warner Books, 1993), 836–38.
The entire text of this useful encyclopedia is now available online, free of charge, at http://www.econlib.org.

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4 PART 1 THE ECONOMIC WAY OF THINKING

1-1 WHAT IS ECONOMICS ABOUT?

Economics is about scarcity and the choices we have to make because our desire for goods
and services is far greater than their availability from nature. Would you like some new
clothes, a nicer car, and a larger apartment? How about better grades and more time to
watch television, go skiing, and travel? Do you dream of driving your brand-new Porsche
into the driveway of your oceanfront house? As individuals, we have a desire for goods that
is virtually unlimited. We may want all of these things. Unfortunately, both as individuals
Scarcity and as a society we face a constraint called scarcity that prevents us from being able to
Fundamental concept of completely fulfill our desires.
economics that indicates that Scarcity is present whenever there is less of a good or resource freely available than
there is less of a good freely
available than people would
people would like. There are some things that are not scarce—seawater comes to mind;
like. nature has provided as much of it as people want. But almost everything else you can think
of—even your time—is scarce. In economics, the word scarce has a very specific meaning
that differs slightly from the way it is commonly used. Even if large amounts of a good
have been produced, it is still scarce as long as there is not as much of it freely available
as we would all like. For example, even though goods like apples and automobiles are
Choice relatively abundant in the United States, they are still scarce because we would like to have
The act of selecting among more of them than nature has freely provided. In economics, we generally wish to deter-
alternatives. mine only if a good is scarce or not, and refrain from using the term to refer to the relative
availability or abundance of a good or resource.
Resource
An input used to produce Because of scarcity, we have to make choices. Should I spend the next hour studying or
economic goods. Land, watching TV? Should I spend my last $20 on a new cell phone case or on a shirt? Should this
labor, skills, natural resources, factory be used to produce clothing or furniture? Choice, the act of selecting among alter-
and human-made tools and natives, is the logical consequence of scarcity. When we make choices, we constantly face
equipment provide examples.
trade-offs between meeting one desire or another. To meet one need, we must let another
Throughout history, people
have struggled to transform go unmet. The basic ideas of scarcity and choice, along with the trade-offs we face, provide
available, but limited, resources the foundation for economic analysis.
into things they would like to Resources are the ingredients, or inputs, that people use to produce goods and ser-
have—economic goods. vices. Our ability to produce goods and services is limited precisely because of the limited
nature of our resources.
Capital Exhibit 1 lists a number of scarce goods and the limited resources that might be used
Human-made resources (such to produce them. There are three general categories of resources. First, there are human
as tools, equipment, and resources—the productive knowledge, skill, and strength of human beings. Second, there
structures) used to produce
other goods and services. They are physical resources—things like tools, machines, and buildings that enhance our ability
enhance our ability to produce to produce goods. Economists often use the term capital when referring to these human-
in the future. made resources. Third, there are natural resources—things like land, mineral deposits,

EXHIBIT 1
SCARCE GOODS LIMITED RESOURCES
A General Listing of Food (bread, milk, meat, eggs, Land (various degrees of fertility)
Scarce Goods and vegetables, coffee, etc.) Natural resources (rivers, trees, minerals,
Limited Resources Clothing (shirts, pants, blouses, shoes, oceans, etc.)
socks, coats, sweaters, etc.) Machines and other human-made physical
History is a record of our
Household goods (tables, chairs, rugs, resources
struggle to transform
beds, dressers, television sets, etc.) Nonhuman animal resources
available, but limited,
Education Technology (physical and scientific
resources into goods that
National defense “recipes”
recipes” of history)
we would like to have.
Leisure time Human resources (the knowledge, skill,
Entertainment and talent of individual human beings)
Clean air
Pleasant environment (trees, lakes, rivers,
open spaces, etc.)
Pleasant working conditions

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 CHAPTER 1 THE ECONOMIC APPROACH 5

oceans, and rivers. The ingenuity of humans is often required to make these natural re-
sources useful in production. For example, until recently, the yew tree was considered a
“trash tree,” having no economic value. Then, scientists discovered that the tree produces
taxol, a substance that could be used to fight cancer. Human knowledge and ingenuity
made yew trees a valuable resource. As you can see, natural resources are important, but
knowing how to use them productively is just as important.
As economist Thomas Sowell points out, cavemen had the same natural resources at
their disposal that we do today. The huge difference between their standard of living and
ours reflects the difference in the knowledge they could bring to bear on those resources
versus what we can.1 Over time, human ingenuity, discovery, improved knowledge, and
better technology have enabled us to produce more goods and services from the available
resources. Nonetheless, our desire for goods and services is still far greater than our ability
to produce them. Thus, scarcity is a fact of life today, and in the foreseeable future. As a
result, we confront trade-offs and have to make choices. This is what economics is about.

1-1a SCARCITY AND POVERTY ARE NOT THE SAME

Think for a moment about what life was like in 1750. People all over the world struggled 50,
60, and 70 hours a week to obtain the basic necessities of life—food, clothing, and shelter.
Manual labor was the major source of income. Animals provided the means of transportation.
Tools and machines were primitive by today’s standards. As the English philosopher Thomas
Hobbes stated in the seventeenth century, life was “solitary, poor, nasty, brutish, and short.” 2
Throughout much of South America, Africa, and Asia, economic conditions today
continue to make life difficult. In North America, Western Europe, Oceania, and some
parts of Asia, however, economic progress has substantially reduced physical hardship and
human drudgery. In these regions, the typical family is more likely to worry about financ-
ing its summer vacation than about obtaining food and shelter. As anyone who has watched
the TV reality show Survivor knows, we take for granted many of the items that modern
technological advances have allowed us to produce at unbelievably low prices. Contestants
on Survivor struggle with even basic things like starting a fire, finding shelter, and catching
fish. They are thrilled when they win ordinary items like shampoo, rice, and toilet paper.

The degree to which modern

Monty Brinton/CBS Photo Archive/Getty Images

technology and knowledge

allow us to fulfill our desires
and ease the grip of scarcity
is often taken for granted—
as the castaways on the CBS
reality series Survivor quickly
find out when they have to
struggle to meet even basic
needs, such as food, shelter,
and cleaning their bodies and
clothes.

1
Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980), 47.
2
Thomas Hobbes, Leviathan (1651), Part I, Chapter 13.

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6 PART 1 THE ECONOMIC WAY OF THINKING

During one episode, a contestant eagerly paid over $125 for a small chocolate bar and
spoonful of peanut butter at an auction—and she considered it a great bargain!
It is important to note that scarcity and poverty are not the same thing. Scarcity is an
Objective objective concept that describes a factual situation in which the limited nature of our
A fact based on observable resources keeps us from being able to completely fulfill our desires for goods and services.
phenomena that is not
In contrast, poverty is a subjective concept that refers to a personal opinion of whether
influenced by differences in
personal opinion. someone meets an arbitrarily defined level of income. This distinction is made even clearer
when you realize that different people have vastly different ideas of what it means to be
Subjective poor. The average family in the United States that meets the federal government’s defini-
An opinion based on personal
tion of being “in poverty” would be considered wealthy in most any country in Africa.
preferences and value
judgments. A family in the United States in the 1950s would have been considered fairly wealthy if it
had air conditioning, an automatic dishwasher or clothes dryer, or a television set. Today,
the majority of U.S. families officially classified as poor have many items that would have
been viewed as symbols of great wealth just 65 years ago.
People always want more and better goods for themselves and others about whom
they care. Scarcity is the constraint that prevents us from having as much of all goods as
we would like, but it is not the same as poverty. Even if every individual were rich, scarcity
would still be present.

1-1b SCARCITY NECESSITATES RATIONING

Rationing Scarcity makes rationing a necessity. When a good or resource is scarce, some criterion
Allocating a limited supply of must be used to determine who will receive it and who will go without. The choice of
a good or resource among which method is used will, however, have an influence on human behavior. When rationing
people who would like to
have more of it. When price is done through the government sector, a person’s political status and ability to manipulate
performs the rationing function, the political process are the key factors. Powerful interest groups and those in good favor
the good or resource is al- with influential politicians will be the ones who obtain goods and resources. When this
located to those willing to give method of rationing is used, people will devote time and resources to lobbying and favor
up the most “other things” in seeking with those who have political power, rather than to productive activities.
order to get it.
When the criterion is first-come, first-served, goods are allocated to those who are fast-
est at getting in line or willing to spend the longest time waiting in line. Many colleges use
this method to ration tickets to sporting events, and the result is students waiting in long
lines. Sometimes, as at Duke University during basketball season, they even camp out for
multiple nights to get good tickets! Imagine how the behavior of students would change if
tickets were instead given out to the students with the highest grade point average.
In a market economy, price is generally used to ration goods and resources only to
those who are willing and able to pay the prevailing market price. Because only those
goods that are scarce require rationing, in a market economy, one easy way to determine
whether a good or resource is scarce is to ask if it sells for a price. If you have to pay for
something, it is scarce.

1-1c THE METHOD OF RATIONING INFLUENCES

THE NATURE OF COMPETITION
Competition is a natural outgrowth of scarcity and the desire of human beings to improve
their conditions. Competition exists in every economy and every society. But the criteria
used to ration scarce goods and resources will influence the competitive techniques em-
ployed. When the rationing criterion is price, individuals will engage in income-generating
activities that enhance their ability to pay the price needed to buy the goods and services
they want. Thus, one benefit of using price as a rationing mechanism is that it encour-
ages individuals to engage in the production of goods and services to generate income. In
contrast, rationing on the basis of first-come, first-served encourages individuals to waste
a substantial amount of time waiting in line, while rationing through the political process
encourages individuals to waste time and other resources in competing with others to influ-
ence the political process.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
 CHAPTER 1 THE ECONOMIC APPROACH 7

Within a market setting, the competition that results from scarcity is an important
ingredient in economic progress. Competition among business firms for customers results
in newer, better, and less expensive goods and services. Competition between employers
for workers results in higher wages, benefits, and better working conditions. Further, com-
petition encourages discovery and innovation, two important sources of growth and higher
living standards.

1-2 THE ECONOMIC WAY OF THINKING

One does not have to spend much time around economists to recognize that there is an It [economics] is a method
“economic way of thinking.” Admittedly, economists, like others, differ widely in their rather than a doctrine, an ap-
ideological views. A news commentator once remarked that “any half-dozen economists paratus of the mind, a tech-
will normally come up with about six different policy prescriptions.” Yet, in spite of their nique of thinking which helps
philosophical differences, the approaches of economists reflect common ground. its possessor to draw correct
That common ground is economic theory, developed from basic principles of conclusions.
human behavior. Economic researchers are constantly involved in testing and seeking to —John Maynard Keynes3
verify their theories. When the evidence from the testing is consistent with a theory, even-
tually that theory will become widely accepted among economists. Economic theory, like Economic theory
a road map or a guidebook, establishes reference points indicating what to look for and A set of definitions, postulates,
how economic issues are interrelated. To a large degree, the basic economic principles are and principles assembled
merely common sense. When applied consistently, however, these commonsense concepts in a manner that makes
can provide powerful and sometimes surprising insights. clear the “cause-and-effect”
relationships.

1-2a EIGHT GUIDEPOSTS TO ECONOMIC THINKING

The economic way of thinking requires incorporating certain guidelines—some would say
the building blocks of basic economic theory—into your own thought process. Once you
incorporate these guidelines, economics can be a relatively easy subject to master. Students
who have difficulty with economics have almost always failed to assimilate one or more
of these principles. The following are eight principles that characterize the economic way
of thinking. We will discuss each of these principles in more depth throughout the book so
that you will be sure to understand how and when to apply them.

1. The use of scarce resources is costly, so decision-makers must make

trade-offs. Economists sometimes refer to this as the “there is no such thing as a free
lunch” principle. Because resources are scarce, the use of resources to produce one good
diverts those resources from the production of other goods. A parcel of undeveloped land
could be used for a new hospital or a parking lot, or it could simply be left undeveloped.
No option is free of cost—there is always a trade-off. A decision to pursue any one of
these options means that the decision-maker must sacrifice the others. The highest valued
alternative that is sacrificed is the opportunity cost of the option chosen. For example, Opportunity cost
if you use one hour of your scarce time to study economics, you will have one hour less The highest valued alternative
time to watch television, spend social networking, sleep, work at a job, or study other sub- that must be sacrificed as a
result of choosing an option.
jects. Whichever one of these options you would have chosen had you not spent the hour
studying economics is your highest valued option forgone. If you would have slept, then
the opportunity cost of this hour spent studying economics is a forgone hour of sleep. In
economics, the opportunity cost of an action is the highest valued option given up when a
choice is made.
It is important to recognize that the use of scarce resources to produce a good is always
costly, regardless of who pays for the good or service produced. In many countries, vari-
ous kinds of schooling are provided free of charge to students. However, provision of the

3
John Maynard Keynes (1883–1946) was an English economist whose writings during the 1920s and 1930s
exerted an enormous impact on both economic theory and policy. Keynes established the terminology and the
economic framework that are still widely used when economists study problems of unemployment and inflation.

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Exploring the Variety of Random
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BIOGRAPHICAL SKETCHES. I OO T Sarah Nancy, wife of

Robert Morrow, of Warren county, and Mary, wife of David
Montgomery, of Venango county. James J. Sutton, son of John and
Mary Sutton, was born in Concord township, Butler county, January
IS, 18*54. His boyhood day- were passed upon his father's farm,
and he obtained a limited education in the lug school house of his
district, which he attended for a few months in the winter seasons.
When about ten years of age he removed with his parents to
Armstrong county, lived there about nine years, and then returned to
Butler county, where he attained his majority. On January IS, 1859,
he married Harriet, a daughter of Matthew and Sarah Brown, born in
Fairview township, March 11, 1837. Matthew Brown was a son of
John Brown, a native of Ireland, who settled in what is now Fairview
township at an early day. In 1861 Mr. Sutton located at Buena Vista,
where he has since resided. In September, 1804, he enlisted in
Company B. Fiftieth Pennsylvania Volunteers. His company was
assigned to service as a part of the First Division, Ninth Army Corps,
of the Army of the Potomac. lie served until the close of the war, was
with his regiment in the grand review at Washington, and was
honorably discharged in June, 1805. He returned to his home, and in
1870 was appointed the first postmaster of Peachville, serving in
that capacity until 1888, since which time he has lived a retired life
at Buena Vista. He owns a valuable farm of eighty-four acres in
Fairview township, and is interested in oil producing. In politics, he is
a stanch Republican, anil has always taken an active interest in
political matters. Mr. and Mrs. Sutton are members of Zion Lutheran
church, in which body he has served as deacon and elder. They are
the parents of one daughter, Leni Luemma, wife of W. 1). Dart, of
Buena Vista. George Kixg, one of the well known older citizens of
Fairview township,, was born in Armstrong county. May 3, 1820, son
of Jonathan and Elizabeth King. His father was a native of
Westmoreland county, came to Armstrong county with his parents,
who settled at Brady's Bend, there married and afterwards served
one term as sheriff of that county. At the age of eleven years George
was bound out to a family for his board and clothing until his
seventeenth year. He then worked by the month as a farm hand,
receiving his board andclothes and eighteen dollars in cash for his
first season's work. Thus he laid the foundation of an industry and
economy which served him well in after years. ( >n November 14,
1848, he married Magdalena Kamerer. a daughter of David and
Catherine Kamerer, a native of Armstrong county, born May 24,
1881. They immediately settled upon the farm where they now
reside, which was then comparatively unimproved, taking up their
abode in a little log cabin surrounded by forest trees. Of the eight
children born to them, seven grew to maturity, viz. : John H. ; Daniel
S. ; Catherine A., wife of George Hiles : Elizabeth, deceased wife of
Louis Kieffer ; Jared D. : Margaret, wife of William Corbett, and
Aaron A. Mr. King and wife are members of Oak Grove German
Reformed church, and in politics, he was originally a Whig and
afterwards a Republican. Daniel S. King, second son of George and
Magdalena King, was born in Fairview township, Butler county.
March 81, 1852. At the age of sixteen Marhe went to Brady's Bend,
and learned the butcher's trade with Joseph Hertweck,
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1002 HISTORY OF BUTLER COUNTY. who afterwards

became his father-in-law, with whom he remained four years. In lsTo
he came to Butler county, and in partnership with his brother, John
II., engaged in the butchering business. He later became interested
in the oil industry as a pumper, subsequently as a producer, 'and has
now a good production. Mr. King was married November 9, 1880, to
Annie Hertweck, a native of Butler. Her father. Joseph Hertweck, was
born in Germany, October 27, ls-'>-'.. immigrated to the United
States, and October 28, 1854, was married at Butler to Philomina
Geiser, also a native of Germany. They resided in Butler some years,
thence removed to Brady's Bend, where Mr. Hertweck died
September 12. 1888. Mr. and Mrs. King have had the following
children: Charles Sylvester ; Joseph George, deceased; Catherine C.
; Cora Maude; Dora Ellen; William John, deceased, and Rose Emma,
deceased. Mr. King is an active Republican, and he is connected with
Millerstown Lodge, K. of P. John II. King, eldest son of George and
Magdalena King, was born in Fairview township. Butler county,
January 21, 1850, and remained with his parents helping them to
clear ami improve the farm until he attained his majority. He then
went to East Brady, and followed the bricklayer's trade four years. In
1ST;! he engaged in the butchering and meat business with his
brother, Daniel S., and later embarked in the oil industry, as a
pumper and producer, to which he still devotes his attention. On
August 9, 1883, he married Maggie J., a daughter of Leonard and
Christina Kavlor, of Armstrong county, where she was born October
28, 1863. Two children have been born to this union, one of whom is
living, Lillie May. Mr. King is a stanch Republican, ami is connected
with Derrick Lodge. K. of P., at Karns City. John Ellenberger, a native
of Armstrong county, married Elizabeth Fair, and resided for many
years in his native county. lie afterwards removed to Butler county,
settling on a farm in Fairview township, upon which he resided down
to his death, in 1881, aged eighty-one years. His widow died on the
old homestead in Armstrong county, in 1891, aged eighty-nine years.
They reared a family of seven sons and two daughters, of whom the
following survive : Simon, of Armstrong county; William; )ohn ;
Jacob, and Charles, all residents of Fairview township, and Enos, of
Oakland township. WlLLIAM Eli.exbekger, son of John and Elizabeth
Ellenberger. was born on the homestead in Armstrong county,
December 2-3, 1826. His boyhood class were -pent beneath the
parental roof, and his education was obtained in the pioneer log
school house of the neighborhood. In 18-49 Mr. Ellenberger came to
Butler county and located in Fairview township. On February 14,
1850, be married Harriet Keep, a native of Butler county, and a
daughter of Henry and Fannie Reep. Her father came from eastern
Pennsylvania to Butler county at an early day. and married here, his
wife being a native of Armstrong county. He was a soldier in the War
of 1812, and died upon his farm, one mile north of Fairview,
September '.I, 1859. His widow died August 1'.). 1871) in her
seventysixth year. Following their marriage, Mr. and Mrs. Ellenberger
located on a farm in Fairview township. The land was comparatively
unimproved, their first home being a little log cabin in which they
lived for three years. They then removed to another farm near by,
where they resided until 1892, and then located
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BIOGRAPHICAL SKETCHES. IOO3 in the village of Fairview.

They are members of St. Peter's Reformed church, of Fairview, in
which he tills the office of elder. Ten children have been born to
them, as follows : Mary E., wife of Samuel T. Dodd ; Jemima, wife of
W. H. Reisinger ; William f. ; Henry Isaiah, deceased; Margaret E.,
wife of J". I!. Bickey ; Lucinda C, wife of William C. Hart; Fannie J.,
wife of T- Eberhardt ; Adela Laura, wife of H. W. Hays; Chambers
Austin, and Simon P., deceased. Though formerly a Republican, Mr.
Ellenberger is now a Prohibitionist. lie has served as overseer of the
poor and is a member of the borough council. By industrv and
economy he has accumulated a handsome competence, and is
recognized as one of the substantial citizens of the community. Isaac
Ellenhekgeu, a son of John and Elizabeth Ellenberger, was born in
Armstrong county, Pennsylvania, August 12, 1821, and grew to
maturity beneath the parental roof. In ls4(j he married Elizabeth
Reep, a native of Fairview township, born June 21, 1821. Her father,
Henry Reep, married Fannie Utterman, and both he and wife died in
Fairview township. The subject of this sketch located in Fairview
township, near Buena Vista, after his marriage, but settled upon the
farm where his widow now resides in 1853. Here he died on
February 1, 1861. He was the father of six children, as follows: John
Henry; Fanny, wife of Frederick Kamerer; Isaac, and Marv. both
deceased; Amos W.. and Walter I., deceased. Amos W. Ellenberger,
son of Isaac and Elizabeth Ellenberger. was born in Fairview
township, June 16, 1856, and has spent his entire life in this
community. He resides upon the old homestead farm and devotes
his attention to agriculture, though he has also some oil production.
Mr. Ellenberger was married June 15, 1882, to Emma D., a daughter
of William and Rosa Lange, of Oakland township, to which union
have been born five children, viz. : Mary E. ; Walter; Blanche,
deceased; Rosa C, and Minnie F. Politically, he is a standi Republican.
Charles Swartzlander was born in Berks county, Pennsylvania, in
June, 1822, son of Abraham and Elizabeth Swartzlander. When
Charles was seven years old his parents removed to Armstrong
county, making the trip in a covered wagon drawn by three horses,
our subject walking much of the distance. His father purchased a
claim in Armstrong county, upon which he subsequently settled, and
both he and wife died there. Charles grew to maturity in that county
amid the scenes and hardships of pioneer days, attending school in
a little log building with the rudest furnishings of the period. When
fourteen years of age he worked six months for fifty dollars. In 1843
he came to Butler county and worked at the carpenter's trade,
having served an apprenticeship of two years at that business. On
May li, 1S47. he married Phoebe Pontius, a daughter of Gabriel and
Mary Pontius. She was born on the Pontius homestead in Donegal
township, September i':!, 1828, and is the mother of the following
children: Harvey (>.; Amos G., deceased; Samuel M. ; William J.,
and Mary A. M., deceased. In politics, Mr. Swartzlander is a
Republican. Ilis wife is a member of the English Lutheran church,
and the family are adherents of that faith. Their son, Harvey O., was
born April It). 1S4S. in Fairview township, and has
The text on this page is estimated to be only 27.26%
accurate

1004 HISTORY OF BUTLER COUNTY. always followed the

vocation of a farmer. He is a member of Karns City Lodge, I. O. O. F.,
which he joined September ',), 1876. Politically, he is an ardent
Republican. Isaac Kepple was born in Westmoreland county,
Pennsylvania, December 2'2, 1817. His father, Lewis Kepple,
removed from eastern Pennsylvania to Westmoreland county, in
early manhood, and there married Christina Kline. Eleven children
were born to this union, five of whom survive, viz. : John, a resident
of Armstrong county ; Isaac, of Butler county ; Daniel, of Iowa;
Jonathan, who reside-- in this county, and Mrs. Margaret Barnhart,
of Oakland township. The subject of this sketch grew to maturity in
his native county, assisting in the farm duties, wearing home-made
clothing, and helping his mother to prepare the tlax and wool from
which the clothing for the family was made upon the home loom. He
attended the subscription schools of his period, and shared the trials
and hardships of pioneer days. When eighteen years of age his
father died, and Isaac started out for himself, as a farm hand,
receiving tor his labor from forty to fifty cents per day. He later
found employment upon the Pennsylvania canal, afterwards rented
the old homestead in Westmoreland county, which he tilled for a
number of years, and then purchased a farm of his own in that
county. In 1848 Mr. Kepple sold his property, came to Butler county,
and located upon his present farm in Fairview township, near Buena
A ista. Here he has since resided, but has greatly improved the place
during the passing years. ( )il was found upon his farm in paving
quantities, and at one time there were eleven producing wells upon
it. He still has a good production from two independent wells. Mr.
Kepple was married October 16, 1 850, to Mary, a daughter of
George and Catherine (Barnhart) Thorn, early settlers of Butler
count}'. She was born in Fairview township. September 3, L 828,
and is. the mother of five children, viz. : Angeline ; William: Winfield
; Addison, and one who died in infancy. The family are members of
the Reformed church, and in politics. Mr. Kepple is an ardent
Republican. William Heron, a farmer and producer, was born in
Toronto. Ontario, May 17. 1837, son of Adam and Hannah (Ashberrv)
Heron, natives of Scotland and England, respectively. They were
married in England, thence went to Canada and later came to
Pennsylvania, where the father died and where the mother still
resides. William began life for himself working upon a farm when
twelve years of age. In 1804 he came to Titusville, Venango county,
where he engaged as a pumper in the oil fields. In 1873 he located
at Karns City, where he followed the oil industry, and afterwards
purchased an interest in a well on the J. B. Campbell farm. He
followed producing for some years, and in the spring ot 1883
purchased the Campbell farm, consisting of 186 acres, upon which
he has since resided. Mr. Heron was married in 1866, to Emma
Ilobbs . anative of Canada, to which union were born six children,
viz. : Minnie, deceased ; Charles E. ; Archie J. ; James A. ; Cora E.,
and Belle, deceased. Mrs. Heron died in 1884, and he was again
married, February 15, 1887, to Mrs. Ada E. Campbell, widow of
James R. Campbell, by whom she had the following children : Xancy
Jane, deceased; Cora J., deceased, and Lulu M. Mrs. Heron is a
daughter of John and Mary Graham, and a native of Allegheny
township, Butler county.
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BIOGRAPHICAL SKETCHES. IOC<5 By her marriage to Mr.

Heron she is the mother of one daughter, Emma, deceased. In
politics, Mr. Heron is a Republican. lie is a member of Argyle Lodge,
Number 540. F. & A. M. Nicholas Pontius, one of the well known and
prominent citizens of Fairview township, was born in Prussia,
Germany, April 18, 1832, son of Charles and Elizabeth (Hartwick)
Pontius, natives of Prussia. Charles Pontius was a shoemaker, and
came to the United States, with his wife and six children, in 1S45,
landing at Baltimore, and thence proceeding to Pittsburg, where he
followed his trade. Later he settled on a farm in Washington county,
Ohio, where both he and wife died. Thev were the parents of six
children, three of whom are living, viz. : Charles, a merchant of
Cameron, Ohio; Nicholas, and Caroline, wife of Gottlieb Fox. of
Virginia. The subject of this sketch spent his bovhood days in his
native land, where he received a common school education. He was
thirteen years of age when his parents came to the United States,
the voyage across the Atlantic in a sailing vessel consuming fifty six
days. After arriving at Pittsburg he entered a furniture manufactory,
and served an apprenticeship of three years as a finisher, receiving
three dollars per week and later four dollars per week during his
apprenticeship, lie afterwards worked as a journeyman until 1862, in
which vear he located at Millerstown, Butler county, and engaged in
the mercantile business. In 1S04 he removed to Buena Vista, where
he continued in business until 1878, in which vear he retired. In the
meantime he had embarked in the oil industry, and now owns 140
acres of good land with a profitable production, lie is also interested
in the eastern belt, is one of the leading producers of his localitv,
and at one time owned an interest in fifty-six wells in the Millerstown
field. He is a stockholder in the Producers Pipe Line Company, and
was one of the original stockholders in the German Oil Refinery at
Brady's Bend, which was afterwards purchased by the Standard Oil
Company. In 1852 Mr. Pontius was married, in Pittsburg, to Christina
Wolfe, a native of Saxony, Germany, who came to Butler county with
her parents when live years of age. To this union has been born one
son, Edward, who died in infancy. Politically. Mr. Pontius is a
Republican, and is a member of the I. O. O. F. In 1878 he and his
wife spent the summer on a visit to their native land, enjoving a
portion of the fruits which his industry and economy accumulated.
He has been a very successful business man, and is recognized as
one of the substantial citizens of the county. Robert O. Shira was
born in Washington township. Butler countv. June 10, 1839, son of
David and Maria Shira. He was reared upon the homestead farm,
and enlisted in Company II, One Hundred and Second Pennsylvania
Volunteers, in September. 1861. He served with his regiment in the
Ar ny of the Potomac, and participated in the battles of Williamsburg
and Fair Oaks. He was wounded in the latter fight, by a gun shot
through the right thigh, and was taken prisoner, but when the rebels
were driven back he was left upon the field for dead. He was sent to
the hospital at Davis Island, and when sufficiently recovered was
granted a furlough. He returned to the hospital and was sent to
Bedloe's Island, and honorably discharged, on a surgeon's
certificate, for disability. In February, 1864. he re-enlisted in his old
company and regiment, was soon promoted to second lieutenant of
Company B, Sixth Heavy Artillery.
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I006 HISTORY OF BUTLER COUNTY. and did good service

until the close of the war. lie was honorably discharged in [une,
1865, and participated in the grand review at Washington. In 1868
Mr. Sliira married Clara E. Graham; they resided in Washington
township until her death. November (j, 1879. She was the mother of
four children, viz. : Flora ,E., deceased; Victor E. ; Edith E., and one
that died in infancy. Mr. Shira was again married, October 5, 1888, to
Margaret Hays. They removed to Fairview borough in the fall of
1898, where they have since resided. They are members of the
United Presbyterian church, and in politics, he is a Republican, and a
member of the G. A. R. Kenneth McIxtosh was born in Inverness,
Scotland, June 10. 1834, son of William and Isabel Mcintosh. In ls4'.t
he came with his parents to Chautauqua county, New York, anil at
the age of sixteen years began working on a farm as a laborer, a
position affording him much hart! work but little pay. About 1857 lie
went west, and for several years dealt successfully in real estate in
Iowa. Wisconsin and Minnesota. Returning to New York he engaged
in fanning ami the dairy business until 1873, in which year he settled
in Butler county, and engaged with the Angell Oil Company, as farm
superintendent. In the spring of 1879 he purchased and located
upon his present farm of 130 acres, at Fairmont, which he has
greatly improved in every way. In 1S61 Mr. Mcintosh married Rose A.
Belding, of Stockton, Xew York, and has three children, viz.: Lizzie
M.. wife of M. A. Lee; Edward E., and Addie. Mrs. Mcintosh died in
18S8. She was a member of the Methodist Episcopal church of Karns
City. Politically, he is a Republican, and is one of the leading farmers
of his township. Patrick R. Burke was born in Brooklyn, Xew York,
March 17. L848, son of James and Mary Ryan (Rvan) Burke, natives
of Ireland. His father came to Brooklyn in early manhood, where he
followed contracting and building, was married in that city to Mary
Ryan, and spent the remaining years of his life there. I lis widow
lives in Cleveland, Ohio. They were the parents of two children,
Patrick R. being the only survivor. He lived in Brooklyn until fourteen
years of age, and attended a private school in that city. In 1862 lie
removed with his mother to Cleveland, and there entered St. Mary's
College, where he remained until the spring of 1866. In June of that
year he located at Franklin, V^enango county, and engaged as a
pumper at Coal City. In the spring of 1 s7-> he settled at Karns City,
where he accepted the position of bookkeeper with the lumber firm
of Rogers & Allen, with whom he remained until May 14, 1875, when
he embarked in the mercantile business in that borough, as a
partner with II. P. Meclimans. In September. 1875, Mr. Burke became
sole proprietor and conducted the business until 1888, in which year
he retired because of ill health. He afterwards devoted his entire
attention to his oil interests in Butler and McKean counties, and is
now the owner of two producing farms in Fairview township. Mr.
Burke was married November 4. 1874, to Ada Z., a daughter of
Hugh P. and Margaret (Campbell) Meclimans, and of the eight
children born to Ibis union, six survive: Franklin K. ; Carrie Maude;
Cleveland R.; Ellen J. ; Eliza, and Eugene. Politically, he has always
been an ardent Democrat ; was twice a delegate to State
conventions; filled the office
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BIOGRAPHICAL SKETCHES. IOO7 of burgess of Karns City,

and is now serving his fourteenth consecutive year as a member of
the school board. He is a Past I). 1). (i. M. in the A. O. L*. W., and
was the prime mover in establishing Karns City Lodge, of which he
was elected first officer and is at present treasurer. He was also one
of the organizers and first N. G. in Karns Citv Lodge, Number 931, I.
O. O. F.. in which he is past D. D. G. M., and treasurer of the lodge
for ten years. He is a prominent member of the Masonic order, and is
connected with Parker Lodge, also with the chapter, commandery,
and consistory, in which he has taken the :'.2nd degree. Mr. Burke is
a prominent citizen of the community, in which he has extensive
business interests, and has done his full share towards building up'
the social and material prosperity of the borough. George E. McGill,
oil producer of Karns Citv, was born in Springfield, Massachusetts,
October 1, 1845, son of George and Sarah McGill. When our subject
was five years old his mother died, and his father removed to
Chautauqua county, New York, where he died in 1857. At the age of
thirteen years, George E. was thrown upon his own resources, but
by industry and economy he soon acquired sufficient funds to enable
him to enter the academy at Westtield. New York, and graduated
from that institution three years later. After a short time spent upon
a farm, he found employment in the oil fields of Venango county, as
an engineer, but soon accpiired some leases and began drilling. His
efforts proved unsuccessful, the first seven wells he put down
coming in dry, and at the age of twentv years he found himself a
bankrupt and $3,000 in debt. This would have discouraged a man of
less determination, but with indomitable energy he persevered, and
securing a small lease on the Foster farm, soon had a well producing
200 barrels a day. This was the turn of the tide in his fortune, and he
subsequently became one of the well known operators in that
famous field. He also conducted extensive operations in Warren
county, and established the Commercial Club Livery, at Titusville. at
an outlay of $22,000. In July, 1872, he came to Butler county and
put down the second well on the McClymond's farm, at Karns City,
which came in at 125 barrels a day, and he has ever since been
prominently identified with the oil industry of Butler county. He is a
Republican in politics, and has served as a member of the Karns City
council. Mr. McGill is proud of the fact that he was one of the
originators and charter members of the Titusville ( >il Exchange, the
tirst established in this country. George Beck, proprietor of the
Producers Refinery, Karns City, was born in Wurtemburg, Germany,
February 8, 1852, son of John George and Anna Maria Beck, natives
of Wurtemburg, where his mother still resides at a ripe old age. The
subject of this sketch grew to maturity in his native land, and there
received a common school education. In ls74 he immigrated to
Pennsylvania and located at Modoc, Butler countv, where he
engaged in the oil business with his brother John, who had settled in
this countv in 1N72. He remained at Modoc until 187*3, then came
to Karns City and operated in that field. In 1878 they purchased the
Producers Refinery, and carried on the business until the death of
John Beck, in January. Is*. 14, since which event George has been
sole proprietor. The works have a capacity of fifty barrels of distilled
petroleum a day, allot which is used in this section of the country.
Mr. Beck was married in 1879, to
 IOOS HISTORY OF BUTLER COCNTY. Anna Maria Bezler. a
native of Wurtemburg, and is the father of five children : Annie M. ;
Minnie B. ; Clara K. ; John A, and Walter W. He is a stanch
Democrat, and is a member of the borough council. He is connected
with Derrick Lodge, K. of P., also with Karns City Lodge, I. O. O. F.
Mr. Beck takes an active interest in public movements and is an
enterprising and progressive citizen. By close attention to his
business affairs he has accumulated through the passing years a
handsome competence, the result of his own inherent industry and
business ability. P. D. Sherwin, proprietor of the Enterprise Coal
Works, at Karns City, was born in .Schuylkill county. Pennsylvania.
November 5, 1848. His parents, Samuel and Dinah Sherwin. natives
of England, immigrated to Pennsylvania ami settled in Schuylkill
county, his father engaging in the coal industry. His mother died in
1857, aged thirty-three years. His father died at Karns City in 1888,
aged sixty-six years. The subject of this sketch was the eldest in a
family of six children, and gained a practical knowledge of mining in
boyhood. In 1800 he went to Richmond, Virginia, and took charge of
the Deep Run coal mine in Henrico county, of that State. In L869,
owing to the prevalence of fever and ague, he returned to Elk
county. Pennsylvania, and took charge of the King mines under his
father. In 1871 he went Monterey, Clarion county, Pennsylvania, and
with his father leased the Miller Edie mine, and in 1873 they leased
the Rattlesnake mine for three years. In 1870 Mr. Sherwin came to
Karns City, and with his father embarked in the coal industry. In
April, 1888, he opened the Enterprise Coal "Works, the most
completely equipped and largest works in this section of the county.
In 1894 he leased and remodeled the Standard mine on the
Pittsburg, Shenangoand Lake Erie railroad, in Clay township. Mr.
Sherwin was married June 28, 1871, to Annie Blackett, a native of
England and a daughter of John Blackett. who came to the United
States with his family when she was an infant. Seven children are
the fruits of this union, as follows: Samuel; John B.; William E. ;
James G. ; Gracie B. ; Charles P.. and Hattie, deceased. Politically,
Mr. Sherwin is a Republican, and is one of the enterprising citizens of
the community. George Straxce, engineer in charge of the National
Transit Company's pump station, at Karns City, was born at Glean,
New York, December 19, 1859, son of John and Catherine Strance,
natives of Wurtemburg, Germany. John 'Strance immigrated in early
manhood to New York, his wife also coming to the same State in
girlhood. They were married and resided in New York for some
years, but removed to Warren county, Pennsylvania, where Mr.
Strance died, and where his widow still resides. George is the fifth
child in a family of four sons and two daughters, and commenced in
life for himself at the age of sixteen years, coming to Petrolia. Butler
county, where he entered the employ of the Western Union
Telegraph Company as messenger boy, and devoted his spare
moments towards acquiring a knowledge of telegraphy. In August,
187'.*. he was placed in charge of the Western Union office at Karns
City, and on November 5 of that year he accepted a situation as
operator in the office of the National Transit Company. The following
year he was promoted to the position of engineer, which he has
occupied for the past fourteen years. He is the architect
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BIOGRAPHICAL SKETCHES. IOO9 of his own good fortune,

having commenced at the bottom round of the ladder. When a
messenger boy at Petrolia his meager earnings would scarcely make
ends meet, but by strict attention to business and a due regard for
the interests of his employer, lie won the promotion he has since
enjoyed. Mr. Strance was married November 21. 1893, to Miss Tillie
Stone, of Millerstown, and has two children. Me is a member of
Derrick Lodge. K. of 1'.. also of Karns City Lodge, I. O. O. F.. and is
connected with the Encampment, at Parker. lie is independent in his
political views, and has been a member of the school board for six
years, during five of which he tilled the office of secretary of the
board. Joseph Earhart was born in Indiana county, Pennsylvania,
March 1(1, 1827, son of David and Catherine (Altman) Earhart,
pioneers of Indiana county. His father was born December 4, 1789,
and his mother in 1788. They resided near Blairsville until 1838,
whence they removed to near the town of Indiana. In 1*4") they
removed to Scott county, Iowa, which they made their home the
balance of their lives. David Earhart died in Armstrong count}-. June
3, 1848, while on a visit to his son. Rev. D. Earhart ; his wife died in
Iowa at the age of eightv-two years. Thev were the parents of
eleven children, nine sons and two daughters, all of whom grew to
maturity, and seven of the number are still living. Joseph was the
ninth child, and spent his boyhood davs with his parents. The first
school he attended was held in a log building twenty feet square,
erected by his father, and furnished in the primitive manner of that
period. In 1845 he went to Scott count)", Iowa, with his parents,
who settled on a farm near Davenport. In 1847 he returned to
Armstrong county, served an apprenticeship at the tinner's trade,
and followed that business for some vears. In 1852 he embarked in
merchandising, and in 1856 located at Butler as a member of the
firm of A. G. Boyd & Company, general merchants. He sold his
interest in 1858 and returned to Armstrong county, and the following
year entered the mercantile business at Worthington, where he
carried on down to 1883. In that year he established a mercantile
business at Karns City, Butler county, which he conducted until 1892.
He then retired to his present farm, one mile south of Karns'City,
upon which he has a good oil production. Mr. Earhart was married
March 1(1, 1853, to Margaret J. Boyd, a daughter of John Boyd,
Esq.. a prominent deceased citizen of Armstrong county. Eleven
children were born to this union, as follows : Sarah A., deceased wife
of P. M. Graff; William P., deceased; Ada F.. wife of Rev. C. A.
Cummings: Anna M., wife of A. M. McCollough ; C. Josephine, wife
of R. M. Hunter; Lyda B. ; Mary W. ; Charles II., a practicing
physician; Harry B. ; Olive Gertrude, and Frances E. The family are
connected with the Presbyterian church, in which Mr. Earhart has
filled the office of elder. Politically, he is a Republican , and when Lee
invaded Pennsylvania he closed his store and went to Harrisburg as
a member of the Home Guards, thus exhibiting his patriotism, love
of country, and devotion to his native State, of which he is justly
proud. Jacob W. Glossnei: was born in Eagleville, Centre countv,
Pennsylvania, March 28, 1849, son of Jacob and Elizabeth Glossner,
natives of Germany, who immigrated to the United Stales. Thev were
the parents of six children, of whom the following still survive;
George, of Clinton countv; Christopher; Jacob W., and Elizabeth, wife
of folm Sloan, of Harrisburg.
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IOIO HISTORY OF BUTLER COUNTY. When Jacob VV. was

about six years of age his father died. His mother subsequently
married James S lyers, an I died when our .subject was a lad of
thirteen, lie was then thrown upon bis own resources, anil found
employment as a driver upon the Pennsylvania canal. On August 26,
1864, being then only fifteen years of age, he enlisted in Company
D. Eighty-first Pennsylvania Volunteers, which was assigned to
service in the First Brigade, First Division. Second Army Corp. He
participated in the siege of Petersburg, the battles of Gravelly Run.
Hatcher's Run, and the surrender of Lee at Appomattox, and was
also with his regiment in the grand review at Washington. I Ie was
honorably discharged at Philadelphia, June 8, 1865 His brother
Daniel served three years in the Forty-fifth Pennsylvania Volunteers.
After the war closed Mr. Glossner engaged as a lumberman, and in
1871 embarked in the butcher business. In the fall of 1ST? he came
to Butler county, located at Millerstown, and engaged in the oil
business. In 188(3 he established a meat market at Karns City,
which he still continues, besides being interested in the oil industry
as a producer. Mr. Glossner is a Republican, has been quite active in
politics, and was elected burgess of his borough in 1888, and has
tilled that position by successive re-elections up to the present. He
has also served upon the school board, and is one of the progressive
enterprising citizens of the town. He is a member of Robert
McDermott Post, G. A. R., of Millerstown. ami is connected with
Derrick Lodge, Number 456, K. of P., of Karns City. Mr. Glossner was
married September I'd, 1882, to Sarah, a daughter of John and Mary
A. (Dickey) White, a native of Butler county. Four children are the
fruits of this union, viz. : Harry D. ; Frederick L. ; Mary Alice, and
Grace A. Mrs. Glossner is a member of the Methodist Episcopal
church, of Karns City. George L. Hilliard, general merchant. Karns
City, was born in Jefferson county, Pennsylvania, November 23,
1861, son of Simon and Lydia Hilliard, natives of Armstrong and
Centre counties, respectively. His father was a blacksmith, and
followed that occupation down to his death, in 1885. His mother
now makes her home with our subject. George L. is the sixth in a
family of seven children. He received a good public school education,
and at the age of fifteen years commenced life as a newsboy on the
railroad, to which he devoted his attention for two years. lie next
spent some time in the lumber regions of Pennsylvania, where he
experienced the hardships and privations of a lumberman's life. At
the age of eighteen he returned to Foxburg, and found employment
as a brakeman on what is now the Pittsburg and Western railroad.
He rose rapidly, and when be resigned his position in 1888, he was
acting in the capacity of passenger conductor. He went to California
in that year, ami for I be following three years was a conductor on
the Atlantic and Pacific railroad. In 1891 he returned to Karns City,
and established his present mercantile business. Mr. Hilliard is a
member of Fox Lodge, Number 825, I. ( ). ( ). F., which be joined
when twenty-one years of age, and is also connected with Valley
Lodge. A. O. (J. W., of Foxburg. He has been a member of Hawkins
Division, Number J 1 1, O. of R. C., at Pittsburg, for nine years. In
1890 be married Miss Mary Joy. of Foxburg. a native of Cornwall,
England, who came to the United States with her parents when lour
years of age. Both In- and wife are members
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BIOGRAPHICAL SKETCHES. of the Methodist Episcopal

church, of Karns City, in which he tills the offices of trustee and
assistant superintendent of the Sunday school. Mrs. Milliard lakes an
active interest in woman's work ami is president of the local branch
of the Epworth League, in which her husband has charge of the
literary work. Chambers Scott, deceased, was a son of Robert Scott,
a native of Scotland, who came to Butler, Pennsylvania, about 181 1,
where he spent the balance of his life. The subject of this sketch was
born in the borough of Butler in 1829. He learned the saddler's
trade, and aboul 1840 established himself in the harness and
saddlery business at Fairview. Being a careful and correct business
man. he prospered from the beginning, and finally engaged in
general merchandising, which he continued down to his death,
August 1. 1887. He was a public-spirited and progressive citizen, and
held various official positions in Fairview borough and township. In
1850 Mr. Scott married Elizabeth Campbell, born in Derry county,
Ireland, in 1830. Eleven children were the fruits of this union, viz. :
William II., of Garden City, Kansas; Mary, wife of YV. II. Jameson;
Salina; Campbell McK. ; Robert C. ; Minerva, wife of O. W. Akins;
Laura M.. wife of Samuel Campbell: John C, of Chicago; Nora, wife
of C. Rankin:' Rhinalda P., and Flossie E. Mr. Scott was a prominent
member of the Methodist Episcopal church, and in his political views,
a Republican. Mrs. Scott resides in Fairview. and is a respected
member of the United Presbyterian church. The business is still
conducted by Mrs. Scott and her children, being under the personal
supervision of her son. Robert C, who. since the death of his father,
has carried it on successfully. James Maxwell was bom in
Westmoreland county. Pennsylvania, in 1S00, and came to Butler
county with his two older brothers. William and John L., when a lad
of sixteen years of age. settling near the town of Butler. In 1820 he
married Rebecca Carson, a native of Lawrence county, and settled at
Mt. Jackson. Lawrence county, where he followed the hatter's trade.
In 1831 he removed to Butler, where he continued the same
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