Economics

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All the information you need—quick, easy, and ON THE MONEY

ECON. Do these letters make you sweat? You’re not alone. From college freshmen to PhD students, economics tops the list of panic-inducing classes.

But help has arrived. Economics DeMYSTiFieD is a curriculum-based, self-teaching guide that makes learning this important business topic easier than ever. Filled with illustrations, plain-English explanations, and real-life examples, it ...

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Overview

All the information you need—quick, easy, and ON THE MONEY

ECON. Do these letters make you sweat? You’re not alone. From college freshmen to PhD students, economics tops the list of panic-inducing classes.

But help has arrived. Economics DeMYSTiFieD is a curriculum-based, self-teaching guide that makes learning this important business topic easier than ever. Filled with illustrations, plain-English explanations, and real-life examples, it starts with the fundamentals and eases you into the more complicated theories, concepts, and mathematical formulas.

When it comes to making this complex topic easy to grasp, Economics DeMYSTiFieD corners the market.

This fast and easy guide features:

  • Expert overviews of key topics, including supply and demand, macro- and microeconomics, consumer price index, and monetary policy
  • Chapter-ending quizzes and a final exam for charting your progress
  • Math equations you can work out to bolster your comprehension
  • Special-focus chapters on the environment, healthcare, and insurance

Simple enough for a beginner, but challenging enough for an advanced student, Economics DeMYSTiFieD is your shortcut to mastery of this otherwise perplexing subject.

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Product Details

  • ISBN-13: 9780071782838
  • Publisher: McGraw-Hill Professional Publishing
  • Publication date: 5/29/2012
  • Edition number: 1
  • Pages: 304
  • Sales rank: 529,398
  • Product dimensions: 7.30 (w) x 9.00 (h) x 1.10 (d)

Meet the Author

McGraw-Hill authors represent the leading experts in their fields and are dedicated to improving the lives, careers, and interests of readers worldwide

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Read an Excerpt

Economics DeMYSTiFieD


By Melanie Fox, Eric Dodge

The McGraw-Hill Companies, Inc.

Copyright © 2012The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-178283-8


Excerpt

CHAPTER 1

Introduction to Economics


This chapter introduces what economics is and why people are sometimes confused by the subject. In addition to the jargon that economists use, economics requires a different way of thinking about problems from the way most people are used to. While economists disagree on many topics, there are some basic principles that they do agree on.


CHAPTER OBJECTIVES

After completing this chapter, the student should be able to:

1. Describe the reasons why many people struggle with economics.

2. Describe what is meant by economic resources.

3. Define opportunity costs and explain why opportunity costs are considered more important than explicit costs.

4. Describe what is meant when economists say that someone thinks "rationally."

5. Define microeconomics and macroeconomics and be able to describe the difference between them.


As two self-described "econ-nerds," your coauthors have each, more times than we care to admit, engaged in versions of the following conversation:

New person (NP): "So what do you do?"

EN (politely, but vaguely): "I'm a college professor."

NP (sensing a productive and perhaps interesting conversation): "Oh really? What do you teach?"

EN (sensing where this is heading): "Economics."

NP (awkward pause, followed by one of the following):

a. "Wow! I hated that class in college!"

b. "Really? Where do you think the stock market is headed?"

c. "Now there's something that I'll never understand."

EN (a little sheepishly): "Yes, I hear that a lot. Did you try that cheese platter? It's amazing!"

So why do so many people we meet have such adverse reactions to the topic? And why are these people so ready to share with us the reasons why they hate economics? We think there are three main factors:

1. Language barriers. Economists have unintentionally made their social interactions more difficult because they use complicated language to communicate simple ideas. Economists have managed to make common sense as difficult as possible. People read the headlines on "double-dip recession" or "currency revaluation" and just don't want to read any further. And who can blame them? In the interest of demystifying economics for you, we define some of these key words and phrases in a way that we think translates the complex language of economists into something simpler and more understandable.

2. Economists don't always agree. People often hear two economists making very different predictions about the same topic. One economist says that universal health care will reduce the federal budget deficit, while another states, with equal confidence, that universal health care will add to the deficit. This is very frustrating to people who genuinely want to be informed about such things. This frustration causes many people to tune out the debate and conclude that economists really don't know what they're talking about.

How can it be that these two "experts" can make such conflicting predictions? The explanation lies in the way in which economists do their research. Economists use theoretical models, simplified versions of the complex world, to predict how changes in one thing will affect other things. Underlying these economic models are assumptions concerning the way the world works. For example, the first economist believes that even if it increases the size of government, universal health care will push the price of medical services downward, making it less expensive for even a larger government to insure people and thus reducing the deficit. The second economist believes that, while the first argument might have some merit, the increased size and cost of the government bureaucracy will outweigh the cost savings for medical services. For the most part, the public wants easy answers to policy questions like the impact of universal health care, but the world is a very complicated place. The economists try to inform these debates with their best economic models, and different assumptions will often produce different predictions. When we look at some of these models, we try to demystify how critical some of these assumptions can be.

3. Math is involved (and graphs, but those are really just math in picture form). The state of Kentucky, like many states faced with a budget deficit, recently increased the tax on tobacco products. Most people understand that a higher tax on tobacco will increase the price of cigarettes to the consumer, and that fewer cartons of cigarettes will be purchased at the higher price. But economists ask a very important question that can be answered only with a little bit of math: "If the price of cigarettes is rising and fewer cigarettes are being bought, will the government actually receive more or less tax revenue from cigarette sales?" While much of the economic research out there involves some high-level math, we believe that most of economics can be demystified with just a few simple mathematical techniques and graphical analysis. The appendix to this chapter provides a little review if you think it's necessary.


Before we get into the real guts of the economic language, models, and graphical analysis, let's cover just a few of the basics that all economists can agree upon, starting with how economics is divided. When the focus is on the decisions made by individuals, households, firms, or industries, we are referring to the subfield of microeconomics. When the focus is on the decisions made by nations, we are referring to macroeconomics.


Scarcity

There is no fundamental economic concept that enjoys as much universal support from economists as does the concept of scarcity. Scarcity is the unfortunate imbalance between our limitless wants and needs and the limited resources that are available to satisfy those wants and needs. Scarcity is really very simple, but it drives all of our decision making and our behavior, and it forces us to choose some goods at the expense of other goods. For example, if a consumer chooses to purchase a $4 gallon of gasoline with her limited income, she cannot use that $4 to consume something else. If a nation chooses to spend $4 billion to improve the highway system, that $4 billion cannot be spent on education. The field of economics studies how society, whether it is the single consumer or a nation, can best make those decisions when confronted with scarcity.


Four Economic Resources

A key component of the notion of scarcity is the fact that society's enjoyment of goods and services is limited by the resources available to us. Economists typically recognize four categories of resources that are available to produce the items that we want.

1. Labor (usually abbreviated as L). The collective size and effort of a nation's workforce.

2. Capital (K). The manufactured productive assets (buildings, tools, and machinery) in the nation.

3. Land (or natural resources, l). The nation's stock of minerals, timber, fisheries, water, and so on.

4. Entrepreneurship (or technology, A). The nation's ability to creatively combine the labor, capital, and land to produce goods and services.


Opportunity Cost

Scarcity requires us to make choices. A consumer who chooses to purchase gasoline rather than a new pair of running shoes has given up the enjoyment that she would have received from the new shoes. Economists refer to this sacrifice as the opportunity cost. The opportunity cost of a choice, like the gasoline, is measured as the value of the next best thing the consumer has given up. How do we place a value on the enjoyment that the running shoes would have provided to our consumer? Economists believe that the price of a product, in this case the shoes, provides a pretty good idea of how much value consumers place upon it. After all, if people are paying $100 for a pair of running shoes, they must believe that they will receive at least $100 worth of enjoyment from them.

Here is where economists tend to think a little differently from "normal people." To an economist, the opportunity cost is more important than the cost measured in dollar terms. Why? Well, opportunity costs reflect what the true cost of something is. Consider the dollar price of something (also called an explicit price) like a concert ticket. If it is for an extremely popular band, chances are that you are going to have to wait in line to ensure that you get a ticket. So even if the face value of the ticket is only $80, the other costs involved may be substantial and may even outweigh the dollar price of the ticket. The true cost of the ticket was all the other things you could have purchased with the $80 plus the opportunity cost of the time involved in purchasing the ticket.


Rational Decision Making

Let's return to the example of the consumer who buys gasoline instead of running shoes. Why did she do this? An economist believes that she has examined her choices and, within the limits of her budget, has made a rational decision to forgo the shoes and purchase the gasoline because doing so makes her better off. Specifically, we assume that the rational consumer goes through life making decisions that will maximize her utility (the word that economists use to describe happiness, usefulness, or economic benefit). Rational consumers seek those things that make them the most happy (provide the most benefit) and avoid those things that make them unhappy (incur lots of cost). In other words, we all attempt to seek economic benefit and attempt to avoid economic cost. We will develop the model of consumer choice in Chapter 2.

Does that mean that consumers always make the best decisions? Not necessarily. All agents make decisions based on the information that they have available. If that information is incomplete or flawed, they might make a decision that they think will make them better off but that in fact does not. A classic example of this is a purchase that generates pollution. When gasoline, a polluting substance, is fairly cheap, people might end up consuming "too much" because they aren't aware of the pollution that it causes. We talk about this later in Chapter 18. What rationality does mean, however, is that decision makers do not knowingly make themselves worse off.


Marginal Analysis

If we accept the premise that consumers seek economic benefit and avoid economic cost, then we must assume that people try to maximize the difference, or net benefit, between the economic benefits they enjoy and the economic costs they incur through their decisions.

People often make decisions to consume or do something on an incremental basis, and at each step of these incremental decisions, they must reevaluate the benefits that they receive and the costs that they incur. Economists refer to the additional benefit received from the next unit of a good as the marginal benefit and the additional cost incurred from the next unit as the marginal cost.

For example, if I believe that I will enjoy $6 of economic benefit from my first cup of coffee, and that cup of coffee comes at a cost of $2, I am receiving $4 of net benefit from the coffee and it would be rational for me to purchase it. Suppose the second cup of coffee would provide me with only $4 of marginal benefit. Should I purchase the second cup? Yes, because I will still enjoy $2 of net benefit ($4 of enjoyment minus $2 of marginal cost) from the coffee. Maybe the third cup of coffee provides me with only $2 of marginal benefit. Should I buy it? Yes, because there is a perfect trade-off between $2 of marginal benefit and $2 of marginal cost. However, suppose the fourth cup of coffee makes me extremely jittery and won't give me any marginal benefit. As a rational consumer, I will not buy the fourth cup of coffee because the marginal cost is greater than the marginal benefit. In fact, the fifth cup kind of makes me nauseous and imposes negative $2 of marginal benefit, so I clearly won't purchase that one either.

The marginal benefits and costs from my coffee consumption are described in Table 1-1.

So long as the marginal benefit of the next unit of something is at least as great as the marginal cost of that unit, the consumer should always purchase the next unit. By consuming three cups of coffee, I receive a total benefit of $6 ($4 + $2 + $0), and thus by making my decisions "at the margin," I have picked the quantity of coffee that maximizes my total net benefit. Had I irrationally consumed the fourth cup, my total net benefit from coffee would have fallen to $4, so I will not make this choice. We will show in several upcoming chapters the importance of marginal analysis in economic decision making.

A common approach that people use when they think about costs and benefits is to think about things "on average." This can lead to irrational behavior. For example, consider the previous example about coffee. If I had consumed five cups of coffee, I would have enjoyed total benefit of $10 ($6 + $4 + $2 +$0 - $2), and so, on average, each cup provided an average benefit of $2 per cup. Given this calculation, one might be tempted to say that each cup was "worth" the price of $2 per cup. Was it? No! Drinking that fifth cup would actually have made me worse off.

TIP Whenever you see the word marginal in economics, you should be thinking "the last one" or "the next one." Our example here involves buyers, but marginal analysis applies to both buyers and sellers.


Economic Models

A paper airplane is not a real airplane, but it has some of the important features of the real thing. We know that a real airplane is much more complex, but a person can see a lot about the fundamentals of aerodynamics by watching the way a paper airplane glides through the air. In the same way, economic models attempt to depict the decisions that consumers, firms, and nations make in a very complex, dynamic world. If a simple economic model can distill these complexities into something that reasonably predicts the outcome of economic decisions, it can be a powerful tool for us.

One important feature of economic models is the need to make assumptions about behavior. For example, in the model of consumer behavior in Chapter 2, we assume that consumers seek to maximize their utility within the constraints of their budget. Later in the book, we assume that firms seek to maximize their profits. Given these assumptions of behavior, we can study how choices are made to pursue the goals of utility (or profit) maximization.

Economic models can be very useful when they can predict how the change in one variable affects the decisions that consumers and firms make. The problem is that, in the real world, there are many variables that are changing at the same time. This makes it very difficult to isolate the impact of a change in just one key variable. Therefore, a second important feature of economic models is the use of the ceteris paribus, or "all other factors held constant," condition.

For example, we might wish to study how consumers react to a higher tax on electricity. We realize that, in reality, there are many factors that affect a consumer's decision to buy a certain amount of electricity for his household. The economist's model will predict that an increased tax on electricity, holding all other factors (like consumer income, weather conditions, and so on) constant, should prompt consumers to purchase less electricity. In fact, it is the ceteris paribus assumption that allows us to study a fundamental economic model such as the model of demand and supply.


Summary

This chapter described some of the basic ideas of economics. Scarcity is the basis of economics, as we all have unlimited wants, but we are faced with limitations on how we can satisfy those wants. Opportunity costs are the most relevant costs to an economic thinker, because the value of the next best alternative to something is what you are really giving up to get that thing. We use resources to try to create things that will satisfy our wants, and resources can be broken down into four categories: land, labor, capital, and entrepreneurship. A major assumption that economists make about agents is that they will act rationally, meaning mainly that they tend to make decisions based on the marginal benefits and marginal costs of those decisions. The basic idea behind economics is that every agent tries to make herself as well off as possible, and economics just describes the way in which agents go about making that happen. In the next chapter, we turn our attention to exactly how one group of agents, buyers, tries to make itself as happy as possible.


(Continues...)


Excerpted from Economics DeMYSTiFieD by Melanie Fox. Copyright © 2012 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Contents

Introduction....................          

Chapter 1 Introduction to Economics....................          

Chapter 2 Utility and Consumer Choice....................          

Chapter 3 Demand....................          

Chapter 4 Production and Cost....................          

Chapter 5 Supply....................          

Chapter 6 Market Equilibrium....................          

Chapter 7 Perfect Competition....................          

Chapter 8 Monopoly....................          

Chapter 9 Imperfect Competition: Monopolistic Competition and Oligopoly......          

Chapter 10 Factor Markets....................          

Chapter 11 Introduction to Macroeconomics....................          

Chapter 12 Unemployment....................          

Chapter 13 Inflation....................          

Chapter 14 The Model of Aggregate Demand and Aggregate Supply................          

Chapter 15 Money and the Money Market....................          

Chapter 16 Fiscal Policy and Monetary Policy....................          

Chapter 17 The Global Economy....................          

Chapter 18 Public Goods and the Environment....................          

Chapter 19 Health Economics and the Market for Health Insurance..............          

Chapter 20 Economic Research....................          

Final Exam....................          

Answers to Quizzes and Final Exam....................          

Index....................          


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