Note that, in 502.47a which you quoted, Dredge has actually been reworded so that it doesn't even use the 'if you do' and 'otherwise' template anymore. Having the right amount of cards is now a prerequisite to using the ability in the first place, presumably to prevent exactly this kind of confusion.
That text was never the official rules to begin with; it was simply reminder text regarding how the ability worked. Magic shorthand, as it were. Close to what the actual rules say, but not actual rules.
But yes, basically if you would draw a card, you can either choose to mill or draw a card. And you can only choose to mill, if you actually have at least that many cards in your library. So, you can't choose to Dredge if you have 2 cards left in your library, and you have to mill 3 to Dredge.