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For technical support, please visit www. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. A former national forms champion himself, Sean has coached five of his students to U. Dedication To my father, Thomas Ray Flynn, who always impressed upon me the importance of good economic policy both for improving our quality of life and as our last, best hope for lifting billions out of poverty and disease.
Having to answer your many insightful questions made me a much better economist. A big thank you to my literary agent Linda Roghaar and my old friend Mike Jones for getting me this book deal.
They heard Dummies and immediately thought of me. I also have to deeply thank Dr. Robert Harris, the technical editor of this book.
His comments and suggestions have made it far better than it would have been otherwise. Finally, many thanks to my parents for always making me do my homework. For other comments, please contact our Customer Care Department within the U. Amick Art Coordinator: Alicia B. But people are clever. They tinker and invent, ponder and innovate. Having to choose is a fundamental part of everyday life. The science that studies how people choose — economics — is indispensable if you really want to understand human beings both as individuals and as members of larger organizations.
I wrote this book so you can quickly and easily understand economics for what it is — a serious science that studies a serious subject and has developed some seriously good ways of explaining human behavior out in the very serious real world. Economics touches on nearly everything, so the returns on reading this book are huge.
This book contains core ideas and concepts that economists agree are true and important — I try to steer clear of fads or ideas that foster a lot of disagreement. Conventions Used in This Book Economics is full of two things you may not find very appealing: jargon and algebra. To minimize confusion, whenever I introduce a new term, I put it in italics and follow it closely with an easy-to-understand definition.
For instance, I indicates investment, so you may see a sentence like this one: I think that I is too big. I try to keep equations to a minimum, but sometimes they help make things clearer. In such instances, I sometimes have to use several equations one after another. Bold is used to highlight the action parts of numbered steps. On the other hand, sometimes stories, factoids, and anecdotes can be both fun and enlightening. Indeed, you welcome them because you like to have things proven to you instead of taking them on faith because some pinhead with a PhD says so.
You like learning why as well as what. That is, you want to know why things happen and how they work instead of just memorizing factoids. How This Book Is Organized This book is divided into five parts to make the material easier to understand and access.
In this section, I explain what you have to look forward to in each of these parts. Part I: Economics: The Science of How People Deal with Scarcity Economics is all about how people deal with scarcity, which is a situation that occurs when the quantities of goods and services that are available for consumption are less than the amounts that people desire to consume.
Part I explains how people go about dealing with scarcity and the tradeoffs that it forces them to make. The rest of economics is just seeing how scarcity forces people to make tradeoffs in more specific situations. Part II: Microeconomics: The Theories of Consumer and Firm Behavior Microeconomic theory attempts to understand and predict the behavior of individual people and individual firms.
It studies what motivates them and how they act to achieve their goals given the constraints they face. You also explore how consumer decisions about what goods and services to purchase and in which quantities to purchase them are driven by a desire on the part of consumers to maximize the total amount of utility, or satisfaction, that they can get from their limited budgets. It deals with the choices countries face about economic growth and development as well as choices about how to best manage their economies to avoid recessions.
It also deals with the misery caused by unemployment and inflation. In this part, you find out about monetary and fiscal policy, the Federal Reserve, the effects of taxation on the economy, and international trade and trade policy. In this part, I give you ten economic ideas to hold dear, ten false economic assertions that are repeated all the time in the media and by politicians, and ten ways to become a better economist.
Icons Used in This Book To make this book easier to read and simpler to use, I include a few icons that can help you find and fathom key ideas and information. It saves you the time and effort of marking the book with a highlighter. This icon alerts you to the presence of a helpful, real-world example.
This icon tells you that the ideas and information that it accompanies are a bit more technical or mathematical than other sections of the book. Feel free to skip this stuff. This icon points out time and energy savers. I place this icon next to suggestions for ways to do or think about things that can save you some effort. This icon discusses any troublesome areas in economics you need to know. Keep an eye open for them for to alert you of potential pitfalls.
The book is also divided into independent parts so that you can, for instance, read all about microeconomics without having to read anything about macroeconomics. The table of contents and index can help you find specific topics easily. Economics studies how people deal with scarcity and the inescapable fact that their wants typically exceed the means available for satisfying them. The fact that life has limits may not at first seem like a good basis for an entire social science, but every government decision, every business decision, and a large chunk of your personal decisions all come down to deciding how to get the most out of limited resources.
Consequently, as I explain in this part, economics is fundamental to nearly all aspects of life. Chapter 1 Discovering What Economics Is and Why You Should Care In This Chapter Taking a quick peek at economic history Observing how people cope with scarcity Separating macroeconomics and microeconomics Getting a grip on the graphs and models that economists love to use Economics is the science that studies how people and societies make decisions that allow them to get the most out of their limited resources.
And because every country, every business, and every person has to deal with constraints, economics is literally everywhere. For instance, you could be doing something else right now besides reading this book. You could be exercising, watching a movie, or talking with a friend. You should only be reading this book if doing so is the best possible use of your very limited time. In the same way, you should hope that the paper and ink used to make this book have been put to their best use and that every last tax dollar that your government spends is being used in the best way.
Stick with me: I make this discussion as painless as possible for you history haters. Standards of living were quite low, and people lived poor, short, and rather painful lives. More than 30 percent of newborns never made it to their 5th birthdays.
A woman had a one in ten chance of dying every time she gave birth. The standard of living was low and stayed low, generation after generation.
Except for the nobles, everybody lived at or near subsistence, century after century. In the last years or so, however, everything changed. For the first time in history, people figured out how to use electricity, engines, complicated machines, computers, radio, television, biotechnology, scientific agriculture, antibiotics, aviation, and a host of other technologies.
Each has allowed people to do much more with the limited amounts of air, water, soil, and sea they were given on planet Earth. The result has been an explosion in living standards, with life expectancy at birth now well over 60 years worldwide and with many people able to afford much better housing, clothing, and food than was imaginable a few hundred years ago.
Of course, not everything is perfect. Grinding poverty is still a fact in a large fraction of the world, and even the richest nations have to cope with pressing economic problems like unemployment and how to transition workers from dying industries to growing industries.
But the fact remains that overall, the modern world is a much richer place than its predecessor, and most nations now have sustained economic growth, which means that living standards rise year after year. The Ancient Greeks invented a simple steam engine and the coin-operated vending machine.
They even developed the basic idea behind the programmable computer. But they never quite got around to having an industrial revolution and entering on a path of sustained economic growth.
So what factors combined in the late 18th century to so radically accelerate economic growth? The short answer is that the following institutions were in place: Democracy: Because the common people outnumbered the nobles, the advent of democracy meant that for the first time, governments reflected the interests of a society at large. A major result was the creation of government policy that favored merchants and manufacturers rather than the nobility.
Limited liability greatly reduced the risks of investing in businesses and, consequently, led to much more investing. Patent rights to protect inventors: Before patents, inventors usually saw their ideas stolen before they could make any money. By giving inventors the exclusive right to market and sell their inventions, patents gave a financial incentive to produce lots of inventions.
Indeed, after patents came into existence, the world saw its first full-time inventors — people who made a living inventing things. Institutions and policies like these have given people a world of growth and opportunity and an abundance so unprecedented in world history that the greatest public health problem in many countries today is obesity. This challenge needs to be faced because certain problems such as infant mortality, child labor, malnutrition, endemic disease, illiteracy, and unemployment are all alleviated by higher living standards and an increased ability to pay for solutions to such problems.
Along those lines, pointing out that many poverty-related problems can be cured is important by extending to poorer nations the institutions that have already been proven by already-rich countries to lead to rising living standards. In addition, developing nations can also learn from the mistakes that were made already-rich countries back when they were in the process of figuring out how to raise living standards — mistakes related to promoting economic growth without causing massive amounts of pollution, numerous species extinctions, or widespread resource depletion.
Consequently, there are two related and very good reasons for you to read this book and get a firm grasp about economics: You can discover how modern economies function. By getting a thorough handle on fundamental economic principles, you can judge for yourself the economic policy proposals that politicians and others run around promoting.
Without scarcity of time, scarcity of resources, scarcity of information, scarcity of consumable goods, and scarcity of peace and goodwill on Earth, human beings would lack for nothing. Chapter 2 gets deep into scarcity and the tradeoffs that it forces people to make. Economists analyze the decisions people make about how to best maximize human happiness in a world of scarcity.
Sending Microeconomics and Macroeconomics to Separate Corners The main organizing principle I use in this book is to divide economics into two broad pieces, macroeconomics and microeconomics: Microeconomics focuses on individual people and individual businesses. For individuals, it explains how they behave when faced with decisions about where to spend their money or how to invest their savings.
For businesses, it explains how profit-maximizing firms behave individually, as well as when competing against each other in markets. Macroeconomics looks at the economy as an organic whole, concentrating on factors such as interest rates, inflation, and unemployment. It also encompasses the study of economic growth and how governments try to moderate the harm caused by recessions.
Underlying both microeconomics and macroeconomics are some basic principles such as scarcity and diminishing returns. Getting up close and personal: Microeconomics Microeconomics gets down to the nitty gritty, studying the most fundamental economic agents: individuals and firms. This section delves deeper into the micro side of economics, including info on supply and demand, competition, property rights, problems with markets, and the economics of healthcare.
Balancing supply and demand In a modern economy, individuals and firms produce and consume everything that gets made. Supply and demand determine prices and output levels in competitive markets. Producers determine supply, consumers determine demand, and their interaction in markets determines what gets made and how much it costs.
See Chapter 4 for details. Individuals make economic decisions about how to get the most happiness out of their limited incomes. They do this by first assessing how much utility, or satisfaction, each possible course of action would give them. They then weigh costs and benefits to select the course of action that will yield the greatest amount of utility possible given their limited incomes.
These decisions generate the demand curves that affect prices and output levels in markets. I cover these decisions and demand curves in Chapter 5. In a similar way, the profit-maximizing decisions of firms generate the supply curves that affect markets. Every firm will decide what to produce and how much to produce by comparing costs and revenues. This behavior underpins the upward slope of supply curves and how they affect prices and output levels in markets, as I discuss in Chapter 6.
I discuss this idea, and much more about the benefits of competition, in Chapter 7. Examining problems caused by lack of competition Unfortunately, not every firm is constrained by competition. Monopolies behave very badly, restricting output in order to drive up prices and inflate profits. These actions hurt consumers and may go on indefinitely unless the government intervenes.
A less-extreme case of lack of competition is oligopoly, a situation in which only a few firms are in an industry. In such situations, firms often make deals not to compete against each other so that they can keep prices high and make bigger profits.
However, these firms often have a hard time keeping their agreements with each other. This fact means that oligopoly firms often end up competing against each other despite their best efforts not to.
You can read more about monopolies in Chapter 8 and oligopolies in Chapter 9. Reforming property rights You can rely upon markets and competition to produce socially beneficial results only if society sets up a good system of property rights.
A property right gives a person the exclusive authority to determine how a productive resource can be used. Thus, for example, a person who has the property right ownership over a piece of land can determine whether it will be used for farming, as an amusement park, or as a nature preserve.
All pollution issues, as well as all cases of species loss, are the direct result of poorly designed property rights generating perverse incentives to do bad things. Economists take this problem seriously and have done their best to reform property rights in order to alleviate pollution and eliminate species loss. Two other common causes of market failure are asymmetric information and public goods: Asymmetric information: Asymmetric information refers to situations in which either the buyer or the seller knows more about the quality of the good that he or she is negotiating over than does the other party.
Because of the uneven playing field and the suspicions it creates, a lot of potentially beneficial economic transactions never get completed. Public goods: Public goods are goods or services that are impossible to provide to just one person; if you provide them to one person, you have to provide them to everybody. Think of an outdoor fireworks display, for example.
The problem is that most people try to get the benefit without paying for it. I discuss both these situations, and ways to deal with them, in Chapter Diagnosing healthcare economics Almost everyone is deeply concerned about access to affordable, high-quality medical care — medical care delivered through government-run national health systems, through employer-sponsored health insurance, or by direct payments made by consumers.
Each system provides different incentives that can affect efficiency, usage, and cost — sometimes quite perversely. Chapter 12 gets you up- to-speed on the incentives, regulations, and policies that determine how both coverage and affordability can be improved from an economics standpoint.
Zooming out: Macroeconomics and the big picture Macroeconomics treats the economy as a unified whole. Studying macroeconomics is useful because certain factors, such as interest rates and tax policy, have economy-wide effects and also because when the economy goes into a recession or a boom, every person and every business is affected. This section gives you an overview of macroeconomics.
Chapter 13 explains GDP in more depth. Inflation measures how prices in the economy increase over time. This topic which is the focus of Chapter 14 is crucial because high rates of inflation usually accompany huge economic problems, including deep recessions and countries defaulting on their debts. Looking at international trade International trade occurs when consumers, firms, or governments purchase products or resources made in other countries.
Because imported goods often compete with locally produced goods, international trade is the subject of endless political controversy and attempts to erect import duties or numerical quotas to keep foreign goods out and thereby make life easier for domestic producers.
Those disputes are intensified by concerns about foreign working conditions, whether foreign producers are unfairly subsidized by their governments, and whether currency exchange rates are being manipulated by foreign governments to give their own firms a cost advantage over firms in other countries.
Chapter 13 explains how economists analyze these and other globalization issues. Understanding and fighting recessions A recession occurs when the total amount of goods and services produced in an economy declines.
Recessions are very painful for two reasons: Less output means less consumption. Many workers lose their jobs because firms need fewer workers to produce the reduced amount of output. Recessions linger because institutional factors in the economy make it very hard for prices in the economy to fall.
If prices could fall quickly and easily, recessions would quickly resolve themselves. The man most responsible for developing antirecessionary policies was the English economist John Maynard Keynes, who in wrote the first macroeconomics book about fighting recessions. It serves as the perfect vehicle for illustrating the two things that can help get you out of a recession.
Two things that can fight a recession are monetary and fiscal policy which I cover in Chapter 16 : Monetary policy: Monetary policy uses changes in the money supply to change interest rates in order to stimulate economic activity. For instance, if the government causes interest rates to fall, consumers borrow more money to buy things like houses and cars, thereby stimulating economic activity and helping to get the economy moving faster. Fiscal policy: Fiscal policy refers to using increased government spending or lower tax rates to help fight recessions.
For instance, if the government buys more goods and services, economic activity increases. In a similar fashion, if the government cuts tax rates, consumers end up with higher after-tax incomes, which, when spent, increase economic activity.
For this reason, Chapter 16 also covers how and why monetary and fiscal policy are constrained in their effectiveness. The key concept is called rational expectations. It explains how rational people very often change their behavior in response to policy changes in ways that limit the effectiveness of those changes. Financial crises are recessions triggered by the failure of important financial institutions to keep their financial promises. Such failures often happen after consumers or businesses take on too much debt and are unable to repay loans to banks.
Sometimes they occur when a government takes on too much debt and cannot repay its bondholders. Chapter 17 discusses the causes and consequences of financial crises. Understanding How Economists Use Models and Graphs Economists like to be logical and precise, which is why they use a lot of algebra and other math. But they also like to present their ideas in easy-to-understand and highly intuitive ways, which is why they use so many graphs.
The graphs economists use are almost always visual representations of economic models. Obviously, other things, such as changing styles and tastes, affect consumer demand as well, but price is key. To avoid a graph-induced panic as you flip through the pages of this book, I spend a few pages helping you get acquainted with what you encounter in other chapters. Introducing your first model: The demand curve When economists look at demand, they simplify by concentrating on prices.
Consider orange juice, for example. The price of orange juice is the major thing that affects how much orange juice people are going to buy. What you find if you look at the data in the preceding table is that the price of orange juice and the quantity demanded of orange juice have an inverse relationship with each other — meaning that when one goes up, the other goes down. Because this inverse relationship between price and quantity demanded holds true for nearly all goods and services, economists refer to it as the law of demand.
But quite frankly, the law of demand becomes much more immediate and interesting if you can see it rather than just think about it.
Creating a demand curve by plotting out the data The best way to see the quantity demanded at various prices is to plot it out on a graph. In the standard demand graph, the horizontal axis represents quantity, and the vertical axis represents price. The horizontal axis of Figure measures the number of gallons of orange juice that people demand each month at various prices per gallon. The vertical axis measures the prices. Figure Graphing the demand for orange juice. Point A is the visual representation of the data in the top row of the preceding orange juice table.
The straight line connecting the points in Figure is called a demand curve. This convention is consistent with the fact that economists are both eggheads and squares. Straight or curvy, you can now visualize the fact that price and quantity demanded have an inverse relationship: When price goes up, quantity demanded goes down. The inverse relationship implies that demand curves slope downward. Generalizing a bit, you can also see that the slope of a demand curve gives quick intuition about the sensitivity of the inverse relationship between price and quantity demanded.
If a demand curve is very steep, then you know that it takes large changes in price to cause even small changes in quantity demanded.
By contrast, a very flat demand curve tells you that even small changes in price will result in large changes in quantity demanded. On the steeper parts of such curves, a change in price causes a relatively small change in quantity demanded. On the flatter part of such curves, a change in price causes a relatively large change in quantity demanded. Using the demand curve to make predictions Graphing out a demand curve allows for a much greater ability to make quick predictions.
Looking at the second and third rows of this table you have to conclude that people will demand somewhere between 6 and 10 gallons per month.
But figuring out exactly how many gallons will be demanded would take some time and require some annoying calculations.
As you can see, using a figure rather than a table makes coming up with model-based predictions much, much simpler. Drawing your own demand curve Try a simple exercise that involves plotting some points and drawing lines between them. What do you think will happen to the demand for orange juice?
Obviously, it should increase. The new responses are here: Your assignment, should you choose to accept it, is to plot these three points on Figure Yes, you can write in the book! Their increased demand is reflected in the fact that at any given price, they now demand a larger quantity of juice than they did before. There is still, of course, an inverse relationship between price and quantity demanded, meaning that even though the health benefits of orange juice make people demand more orange juice, people are still sensitive to higher orange juice prices.
Higher prices still mean lower quantities demanded, and your new demand curve still slopes downward. Chapter 2 Cookies or Ice Cream? Exploring Consumer Choices In This Chapter Deciding what will bring the most happiness Cataloguing the constraints that limit choice Modeling choice behavior like an economist Evaluating the limitations of the choice model Economics is all about how groups and individuals make choices and why they choose the things that they do.
Economists have spent a great deal of time analyzing how groups make choices, but because group choice behavior usually turns out to be very similar to individual choice behavior, my focus in this chapter is on individuals.
To keep things simple, my explanation of individual choice behavior focuses on consumer behavior because most of the choices people make on a day-to-day basis involve which goods and services to consume.
Human beings are constantly forced to choose because their wants almost always exceed their means. Limited resources, or scarcity, is at the heart not only of economics but also of ecology and biology. Describing Human Behavior with a Choice Model Human beings may be complicated creatures with sometimes mystifying behavior, but most people are usually fairly predictable and consistent, and they behave pretty much like other people.
Understanding and even predicting future choice behavior is very important because major shifts in the economic environment are typically the result of millions of small individual decisions that add up to a major trend. For instance, the circumstances under which millions of individuals choose to pursue work or school cumulate to major effects on the unemployment rate.
And the choices these individuals make about how much of their paychecks to save or spend affect whether interest rates will be high or low and also whether gross domestic product GDP and overall economic output will increase or decrease.
I discuss GDP in Chapter In order to predict how self-interested individuals make their choices, economists have created a model of human behavior that assumes that people are rational and able to calculate subtle tradeoffs between possible choices. This model is a three-stage process: 1. Evaluate how happy each possible option can make you. Look at the constraints and tradeoffs limiting your options. Choose the option that will maximize your overall happiness.
Although not a complete description of human choice behavior, this model generally makes accurate predictions. However, many people question this explanation of human behavior.
Here are three common objections: Are people really so self-interested? Are people really aware at all times of all their options? Are people really free to make decisions?
I spend the next few sections of this chapter expanding on the three-step economic choice model and addressing the objections to it. Pursuing Personal Happiness Economists like to think of human beings as free agents with free wills. To economists, people are fully rational and capable of deciding things on their own.
But that begs the question of what motivates people and, in turn, of what sorts of things people will choose to do given their free wills. In a nutshell, economists assume that the basic motivation driving most people most of the time is a desire to be happy. This assumption implies that people make choices on the basis of whether or not those choices will make them as happy as they can be given their circumstances.
This section examines how the pursuit of happiness affects consumer behavior. Using utility to measure happiness If people make choices on the basis of which ones will bring them the most happiness, they need a way of comparing how much happiness each possible thing brings with it.
Along these lines, economists assume that people get a sense of satisfaction or pleasure from the things life offers. Sunsets are nice. Eating ice cream is nice. Friendship is nice.
And I happen to like driving fast. Economists suppose that you can compare all possible things that you may experience with a common measure of happiness or satisfaction that they call utility. Things you like a lot have high utility. Things that you like only a little have low utility. And things you hate like toxic waste or foods that cause you to have allergic reactions have negative utility. Utility acts as a common denominator that allows people to sensibly compare even radically different things.
The concept of utility is very broad. For a hedonist, utility may be the physical gratification of experiencing sensual pleasures. But for a morally conscientious person, utility may be the sense of moral satisfaction received when doing the right thing in a particular situation. The important idea for economists is that people are able to sort out and compare the utilities of various possible activities.
This viewpoint immediately raises objections because people are often willing to endure great personal suffering in order to help others. The same can be said about people who donate to charities. If people give because doing so makes them feel good, their selfless action is motivated by selfish intention. Because economists see human motivation as selfish, economics is often accused of being immoral; however, economics is concerned with how people achieve their goals rather than with questioning the morality of those goals.
For instance, some people like honey, but others do not. Economists make no distinction between these two groups regarding the rightness or wrongness of their preferences. Rather, what interests economists is how each group behaves given its preferences.
Consequently, economics is amoral rather than immoral. They just tend to interpret the desire to pursue morality and equity as an individual goal that maximizes individual happiness rather than as a group goal that should be pursued in order to achieve some sort of collective good.
Yet because they want your money, they end up producing for you everything that you need to have a nice meal. When you trade them your money for their goods, everyone is happier. You think that not having to prepare all that food is worth more to you than keeping your money. And they think that getting your money is worth more to them than the toil involved in preparing all that food. Time, for instance, is always in limited supply, as are natural resources. The second stage of the economic choice model looks at the constraints that force you to choose among your happy options.
For example, oil can be used to manufacture pharmaceuticals that can save many lives. But it can also be used to make gasoline, which can be used to drive ambulances, which also save lives. This site comply with DMCA digital copyright. We do not store files not owned by us, or without the permission of the owner. We also do not have links that lead to sites DMCA copyright infringement.
If You feel that this book is belong to you and you want to unpublish it, Please Contact us. Economics For Dummies 3rd Edition. Download e-Book. A friendly introduction to the study of how and why people really make financial decisions The author is a professor of behavioral and institutional economics at Victoria University Economics For Dummies Online An essential component to improving your financial decision-making and even to understanding current events , Behavioral Economics For Dummies is important for just about anyone who has a bank account and is interested in why—and when—they spend money.
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