What’s New in the Third Edition?

1. We include a new Chapter 24, “Asymmetric Information: Moral Hazard and Adverse Selection.” This chapter covers principal–agent problems and how producers may attempt to take advantage of consumers, for instance, when the producer knows more about the quality of the good than does the consumer. The key concepts of moral hazard and adverse selection are stressed and illustrated with examples, including automobile mechanics, used car salespeople, doctors, health insurance, and online Internet reviews. We also discuss signaling, such as how candidates prove they are worthy of jobs and why engagement rings are bought to signal the quality and commitment of a potential mate.

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2. We have reorganized our chapters on game theory, added new material on game theory and new applications, and turned two chapters into three. In addition to the new chapter on asymmetric information (previously mentioned), the new Chapter 15 is “Oligopoly and Game Theory.” It has more on cheating games, prisoner’s dilemma, and cartel stability than the previous edition did. There are also new discussions of price matching games and also consumer loyalty programs, such as frequent flyer miles and buyer clubs. We again use game theory to help illuminate the world that students actually spend their money in.

3. The new version of Chapter 16 is now “Competing for Monopoly: The Economics of Network Goods.” This chapter considers goods that are more valuable as the number of users increases, such as Facebook, where users wish to share a common network with their friends. Or perhaps listeners wish to share and discuss a common favorite song. We consider whether consumers can be stuck in the wrong network, why these markets often have concentrated supply (there is no close competitor to Facebook), and how such markets can drive high rates of innovation.

4. As part of this extension of the coverage of game theory, we have pulled out our coverage of monopolistic competition and now have an entirely separate Chapter 17, “Monopolistic Competition and Advertising.” In this chapter we also cover the ideas of advertising as information, advertising as signaling, and the behavioral economics of advertising. Advertising of course is especially important in monopolistically competitive market structures.

5. Following up on the introduction of this feature in the second edition, we continue to have extensive coverage of indifference curves and income and substitution effects in Chapter 25, “Consumer Choice.”

6. We have created free, online videos for most chapters in this book. These videos are short (five to seven minutes, usually), visually appealing, and easy to use. We all know that videos can be a very effective medium for teaching and a complement to the classroom and to the written text. We use videos to show supply and demand, the economics of price controls, externalities, trade and the division of labor, the history of economic growth, and many other centrally useful economic concepts. These videos are lively and to the point, in some cases using formal animation techniques, others with a virtual blackboard, à la Khan Academy. Our videos are supplemented with a personally curated list of other video material that wonderfully illustrates economic concepts and history. If you wish to start with a video to see how these work, just try the QR code in the margin to the left. What’s a QR code? You just scan the code with a smartphone and it brings you to a useful Web site or video for illustrating economic concepts. No more typing in long or difficult to remember URLs. A book called Modern Principles should be taking advantage of modern technology. Links to the videos are also in our new coursespace, LaunchPad, along with assessment. The videos can also be found online at MRUniversity.com. And don’t forget that a video, unlike your lecture, can be rewound, rewatched, or taken on a trip if a student misses class. It’s also a lot more portable than a heavy textbook.