Basic Economics for Students and Non-Students Alike

Basic Economics for Students and Non-Students Alike

By Jerry Wyant

Published by Jerry Wyant at Smashwords

Copyright 2013 Jerry Wyant

This e-book is licensed for your personal use only. This e-book may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each recipient. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.

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Table of Contents

Introduction

Basics to Get Started

Supply and Demand

Opportunity Cost

Elasticity

Market Structures

Market Failure

Economic Systems

Money and Banking Basics

Measuring the Economy

The Business Cycle, Unemployment, Inflation

Aggregate Demand and Aggregate Supply

Fiscal and Monetary Policies

Deficits and the National Debt

Globalization

Economic Schools of Thought

About the Author

Dictionary

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Introduction

Thanks for purchasing Basic Economics for Students and Non-Students Alike. I believe that you will find this e-book to be a useful resource: whether you are a student who finds the material easy to understand or a student who is having problems understanding one or more topics covered in your economics class; whether you are taking an introductory economics course or an intermediate-level course; whether you are studying economics because you are interested in the subject or because you are required to take the subject; whether you are a student at all or simply somebody who wants to understand economics; whether you are interested in further studies or if you simply want to become better-informed as a citizen, voter, political junkie, or somebody trying to keep up with current events; whether you are looking for a learning resource in addition to other resources or if you are looking for a primary resource; or if you are an educator who wants an inexpensive resource for your students to use for any of the above reasons.

You can use this e-book to learn the concepts involved in economics whether or not you are comfortable with the graphs, math, and statistics that people normally associate with economics. Graphs are not included, but both the graphs and the concepts behind them are explained; only basic math is included, and you can even skim over the math and still come away with an understanding of the concepts; statistics is not included at all.

Basic Economics for Students and Non-Students Alike is an easy way to learn concepts relating to economics and the economy. It is a product of thousands of hours spent online, teaching basic concepts in economics to hundreds of students worldwide over the course of the past several years. From back and forth communications, I have discovered the explanations for the concepts that students find easiest to understand, as well as the areas that most often get misunderstood and under-emphasized.

I have worked with students located throughout the United States and from many different countries, on six different continents; students from many different school systems with different points of emphasis; students with different levels of knowledge, different backgrounds, and different levels of interest in the subject. I have received numerous comments and testimonials regarding the teaching methods that I incorporate in Basic Economics for Students and Non-Students Alike.

The subject matter included in Basic Economics for Students and Non-Students Alike comes from a compilation of many different textbooks at the introductory and intermediate levels. My goal was to include every subject in economics that normally will be found in an introductory level textbook of economics, microeconomics, or macroeconomics. Since different school systems, different classroom instructors, and different textbooks cover a slightly different combination of topics, Basic Economics for Students and Non-Students Alike is a little more comprehensive than most single introductory textbooks of economics. Some of the topics will be found in introductory classes in some schools, but in intermediate-level classes in other schools.

Basic Economics for Students and Non-Students Alike differs from a normal textbook in a couple of ways. First, while I have made sure to cover the topics that appear in most economics textbooks, and have used several actual textbooks as references for this purpose, all of the text is in my own words. The language that I use is based on what my experience with actual students tells me is the best wording for getting students to understand the material. Second, Basic Economics for Students and Non-Students Alike leaves out the many graphs that you would find in a normal economics textbook. My method involves teaching students to thoroughly understand the concepts and assumptions behind the graphs, and I have found that this method works better without the graphs. I anticipate that many readers of Basic Economics for Students and Non-Students Alike will have other resources that involve graphs, and that students will most likely need to be able to demonstrate a working knowledge of graphs for their classes in economics. However, I also know that a total reliance on teaching methods involving graphs allows many students to get by with some shortcuts - shortcuts that enable them to learn how to draw conclusions from graphs without a thorough understanding of the economic concepts behind the graphs. For example, you might understand that a market price is the price where the demand curve and the supply curve intersect. But if that is the only way that you know how to explain what a market price is, you really don’t understand this basic concept of economics.

While Basic Economics for Students and Non-Students Alike contains no graphs, it does describe the graphs that are involved in a normal textbook of the same material. If your purpose for using this e-book does not require knowledge of graphs, and if you are in any way uncomfortable with graphs, then you may skim over the descriptions of the graphs; just be sure to follow along with the concepts and conclusions that go along with the graphs.

I have identified the following groups of people as those who can benefit from this teaching method. These groups represent the target audience for Basic Economics for Students and Non-Students Alike:

New students, or students of introductory level courses in economics, microeconomics, and macroeconomics, make up the largest group that this e-book is designed to help. These are the people for whom I developed my style of explanations, and this is the group that has benefitted the most in the past from my teaching style.

Advanced students can also benefit from Basic Economics for Students and Non-Students Alike. The material is largely from introductory-level textbooks, but the teaching style emphasizes some of the basic concepts that students tend to overlook as they continue their studies. For example, while different levels of efficiency are present in different market structures, the market structure models themselves are defined using specific assumptions that need to be accounted for in order to move from the models to the real world. It is a fallacy (non sequitur), then, to use the conclusions that can be drawn from the models as given facts for real-world situations.

Would-be students can use this inexpensive resource as a substitute for substantial investments of time and money that would likely be required for actually taking a course in economics. This group can learn what such a class would be like, what topics and concepts are involved, and the meaning of the terminology used by students of economics, all without actually taking a course. In addition, somebody who is trying to decide whether to study economics in the future but isn’t sure what it is all about can use the information in Basic Economics for Students and Non-Students Alike as a valuable part of their decision-making process.

Instructors of economics courses can use this e-book in a number of ways. The information included here is already being used by many schools in third-world and emerging nations that cannot afford more expensive resources. Instructors can refer students who are having problems with one or more concepts to Basic Economics for Students and Non-Students Alike as an additional resource or as an alternative explanation for the same concepts. Instructors of students who wish to study the subject outside of the class curriculum can refer Basic Economics for Students and Non-Students Alike as a resource.

Voters and everybody else who wants to be better informed on important issues in society can benefit from learning the concepts and the terminology from a textbook point of view instead of relying on political pundits and one-sided rhetoric for their knowledge of economics and the economy.

Basic Economics for Students and Non-Students Alike is divided into chapters covering broad subject areas of economics. While jumping to specific chapters is permissible, you should keep in mind that many of the subjects build upon material from previous chapters. In writing this e-book, I assume no previous knowledge of economics concepts or the terminology on the part of the reader. People who don’t read this in the order presented may find themselves facing concepts and terminology that they have not been introduced to. As an added help, I have included all of the economics terminology, including the definitions as they apply to this e-book, at the end in a chapter entitled Dictionary. Feel free to jump to the dictionary at any time.

This title is also available in a print edition from Amazon, Barnes & Noble, and other distributors.

The study begins here with an introduction to some basic points of economics that I consider to be prerequisite to the study of larger subject areas.

Return to table of contents

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Basics to Get Started

This chapter covers various concepts and terminology that are important in the general study of economics, but are not necessarily associated with any specific topic under a specific chapter heading. The text in this chapter doesn’t read like a story line. Instead, it moves from one term or concept to another.

If you are new to the study of economics, a logical place to start would be to ask: What is economics? For the answer to that question, consider these two facts of life: Human wants are unlimited, and resources are finite. This means that not everybody can have everything that they want. This combination of unlimited wants and limited resources is called scarcity. Scarcity, in economics lingo, is not the same thing as shortage. The term shortage is a completely different concept and will be encountered elsewhere in the study of economics. Scarcity is called the economic problem. How individuals, groups of individuals, and entire societies deal with this economic problem is what economics is all about. So one definition of economics is this:

Economics: the study of how people choose to use their scarce resources in an attempt to satisfy their unlimited wants.

Economics deals with the answers to the what, how, and who questions: WHAT should be produced? HOW should it be produced? WHO should it be distributed to?

As you will figure out, if you haven't done so already, the study of economics involves a certain kind of logic, a unique kind of thinking. This kind of logic is one of the things that are difficult to define, but you will recognize it when you see it. This form of thinking is called economic thinking, or the economic approach.

Economic thinking involves the concept that decisions involve benefits and costs, and include unintended consequences. Economists attempt to include all benefits and costs, including the unintended consequences, in the decision making process. This leads to a thoroughness of the thought process not found in all social sciences.

The study of economics involves the study of efficiency. Efficiency means having the maximum benefit at the least cost. In economics, the types of efficiency include productive efficiency, allocative efficiency, and economic efficiency:

Productive efficiency: using the least cost combination of resources to produce a specific output level.

Allocative efficiency: producing what the consumers want at a price equal to marginal cost (you don’t need to worry if you don’t know what marginal cost is at this time; it will be explained later).

Economic efficiency: a situation in which both productive efficiency and allocative efficiency exist.

Different levels of study in economics require different levels of mathematical knowledge. The purpose of Basic Economics for Students and Non-Students Alike is to teach basic economic concepts, not mathematics. With that in mind, an attempt is made to include only a minimal level of math. However, some math is included, because it is impossible to get very far in the study of economics without encountering some math. I am using the following rule for Basic Economics for Students and Non-Students Alike when it comes to using math: Some math is included, but nothing beyond linear algebra; most of the equations that you will see here will be similar to A+B=C, or A divided by B = X%. This will cover the basics, and many students are familiar with the use of such math. For those who are not, much can be learned from reading this e-book: just skip over the math portions that are not understood. Much can be learned in that manner, but more can be learned if the math is also followed. You also don’t have to worry about statistics that are commonly associated with the study of economics. Beginning economics courses generally don’t require much knowledge of statistics, and Basic Economics for Students and Non-Students Alike does not include such studies.

The study of economics, just like any other discipline, has its own terminology. Some of the terms relate to specific concepts, and the meanings will be explained within the chapters that discuss these concepts. Some of the terms will be found throughout the study of economics, across a wide variety of topics. Here is one example:

Firm; business firm; company; enterprise; business; seller; producer

These are all terms that refer to the same thing; the terms are interchangeable. They all refer to an organization that is controlled by one management structure and offers goods or services for sale in the hopes of earning a profit.

Some people are confused by the difference between income and wealth. Income is the amount of money and other assets acquired during a specific time frame. In the framework of the concept of stocks and flows, income is a flow. Wealth is the value of assets owned at a specific point in time. In the framework of stocks and flows, wealth is a stock.

Some of the terms in economics are terms that may have different meanings in different contexts. In order to avoid confusion, I use only the definitions of these terms that relate to the context that they are used in. For convenience, I have added a chapter entitled Dictionary which contains the terms used in Basic Economics for Students and Non-Students Alike as well as a definition for each term; a definition that is specific to the context used here. The list of terms in the Dictionary chapter is much more complete than a list found in most textbook indexes. If it is a term found in the study of economics, and if it is also a term found within the text of Basic Economics for Students and Non-Students Alike, then it is included in the Dictionary. Since I use only context-specific definitions, many of the terms are defined in my own words.

On the subject of economic analysis, the study of economics necessarily involves learning many different topics and concepts. Basic Economics for Students and Non-Students Alike is divided into various topics accordingly. In order to fully understand and analyze real life situations, knowledge of many different topics must be understood and incorporated into the analysis. Most topics are taught in terms of specific relationships, with assumptions made in order to isolate these relationships. These assumptions include one involving ceteris paribus, or everything else held constant or equal. This assumption allows for a better understanding of the concepts being studied. It is necessary to make this assumption for studying concepts, but it is an assumption that does not hold true in the real world and must be relaxed when applying these concepts to real-life situation. In the real world, everything else is not constant or equal. The economy is dynamic, and changes are always occurring. With constant changes, real world analysis means that disequilibrium of some kind is always involved with any situation. Knowing which relationships are in equilibrium and which are in disequilibrium for any given situation is a key to proper economic analysis.

Equilibrium is a very important concept that is involved in all areas of economic analysis. I have found that while textbooks and classroom instruction generally explain this equilibrium well as individual economic principles are introduced, the concept of equilibrium is still often under-emphasized. If you keep in mind that it forms the basis for ALL areas of analysis, you should be able to have a clearer understanding of economic analysis. The definition of equilibrium as it relates to the study of economics:

Equilibrium: a situation in which no forces exist to create changes.

This definition can be applied to all areas of life, not just the areas normally associated with the study of economics.

The opposite of equilibrium is disequilibrium. When disequilibrium exists, the current situation is not sustainable in the long run and will change, with changes moving towards a situation of equilibrium.

Since the real world economy is dynamic, composed of many different inter-relationships, the concept of equilibrium is actually more of a process or a direction of movement, rather than a state of being. One fallacy that I see as common among politicians and others discussing the economy and concepts in economics is the fallacy of non sequitur. In this case, non sequitur means using the conclusions that are drawn from the models and theories as if they were real-world facts instead of what they really are: models based on specific assumptions that may not hold true in the real world.

When you hear people, especially politicians, discuss economic issues, you often hear them talk about what should be done, or what course of action should be followed. Such statements are called normative statements. Normative statements are statements about what ought to be. Other kinds of statements you may hear in relation to economics are called positive statements, which are statements of facts, statements of the results of studies, etc. Positive statements include no value judgments, while normative statements include value judgments. The economic approach requires the avoidance of using normative statements. Only positive statements should be used in applying the principles of economics to real-world situations. The use of normative statements is one trap to avoid when studying economics.

For the economic approach, it might be helpful to note three other common mistakes to avoid:

1. Economics involves the study of human behavior. This should be done by assuming that people's behavior is governed by rational self-interest (more on that a little later), instead of assuming that behavior is governed by ignorance. Don't assume that people behave in a certain way because they are too stupid to behave rationally. Instead, you should assume a rational reason for behavior.

2. Avoid the fallacy of composition. This is the fallacy of saying that what applies to one will apply to many. For example, one person might be better off by saving more and spending less, but the consequences are different if everybody makes the choice to save at the same time.

3. Just because an association between events can