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Economic Thinking

On August 29th, we discussed most of the review questions from Chapter 2: 8am: 2-8; 9:10am: 2, 4-6, 9, 10; 11:30am 2, 4, 6, 9, 10In the 8am section, we further examined deductive and inductive arguments.

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Arguments

Argument – a sequence of statements together with a claim.

Inference – a statement that follows from one or more of the premises.

Conclusion – the final inference in an argument.

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A deductive argument

… is one in which it is impossible for the premises to be true but the conclusion false. Ex:

1. All men are mortal. (premise)2. Socrates was a man. (premise)3. Socrates was mortal. (conclusion)

… is valid if its inferences are correct and it contains no logical fallacies.

… is sound if it is valid and all its premises are true.

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Example of a deductive argument

1. All birds are mammals. (premise)2. A platypus is a bird. (premise)3. Therefore, the platypus is a mammal. (conclusion)

Is it valid?Yes, it is valid. If so, is it sound? No, it is not sound; both premises are false. Nevertheless, the conclusion is true. We have refuted the

argument, but not disproved its conclusion.

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Example of a deductive argument

1. All trees are plants. (premise)2. The redwood is a tree. (premise)3. Therefore, the redwood is a plant. (conclusion)

Is it valid? Yes, it is valid. If so, is it sound? Yes, it is sound; both premises are true. The

conclusion must be true.

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Is it valid? If so, is it sound?

1. Knowledge is power. (premise)2. Power corrupts. (premise)3. Therefore knowledge corrupts. (conclusion)

No, it is not valid. It contains the fallacy of equivocation: Power is used in two different senses. It cannot be sound if it is not valid.

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Is it valid? If so, is it sound?

1. All economists are scoundrels. (premise)2. Eastwood is an economist. (premise)3. Therefore Eastwood is a scoundrel. (conclusion)

Yes, it is valid. No, it is not sound; the first premise is false.

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An Inductive Argument

…is one in which it is probable that the conclusion is true if the premise is true. Here is an example:

1. Socrates was Greek. (premise)2. Most Greeks eat fish. (premise)3. Socrates probably ate fish. (conclusion)

… is strong if the probability is high.… is weak if the probability is low.… is cogent if it is strong and all its premises are

true. … is uncogent if it is weak or if it has a false

premise.

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Try this:

“Pieces of foam fall from the shuttle on almost every launch. However, the shuttle has never been seriously damaged by the foam. The foam is soft, but the wing is strong; the foam could not damage the wing. Therefore, there is no danger to the shuttle.”

Identify and critique.

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Try question 8, page 42: “If society decides to use its resources fully (that is, to produce on

its production possibilities frontier), then future generations will be worse off because they will not be able to use these resources.”

Identify the argument and critique it.1. Some resources are scarce. (premise)2. Producing on the PPF requires full and efficient resource

utilization. (premise)3. Using resources fully uses them faster. (premise)4. Therefore the resources will be depleted sooner. (inference)5. Therefore, future generations will have fewer resources.

(inference)6. Therefore, future generations will be worse off. (conclusion)

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Summary

In a valid deductive argument it is impossible for the premise to be true and the conclusion false.

In a correct inductive argument it is improbable for the conclusion to be false if the premise is true.

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The Fallacy of False Cause

This fallacy occurs when in argument one mistakes what is not the cause of a given effect for its real cause.

When an argument takes the following form, it is often incorrect: Event A occurs, then Event B occurs Therefore A causes B.

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Variants of the False-Cause FallacyPost hoc, ergo propter hoc (Latin)

translates roughly as “after this, therefore because of this.”

Accidental correlation: A occurs when B occurs. Therefore A causes B (or vice-versa).

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The Fallacy of Composition

Assuming that what is true for the individual is true for the group.

Frederic Bastiat’s “Petition of the Candle Makers” illustrates this fallacy.

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The Fallacy of Decomposition

Assuming that what is true for the group is true for the individual.

Example: Gator-Aid tastes sweet. Therefore all the ingredients of Gator-Aid must taste sweet.

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Production Possibility Frontier (PPF) Assumptions:

Quantities of productive factors are fixed, but can be allocated among different types of production.

Technology is constant.All scarce resources are fully and efficiently

employed.

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List the coordinates of the points

0100200300400500600700800900

1000

0 100 200 300 400 500 600Tax Forms (millions/yr)

Bee

f (m

ill. l

b./y

r.)

A:(__,___) B:(___,____)

C:(___,___)

D

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Find the slope of each segment. Include the units.

0100200300400500600700800900

1000

0 100 200 300 400 500 600Tax Forms (millions/yr)

Bee

f (m

ill. l

b./y

r.)

A:(0,1000) B:(200,950)

C:(400,700)

D: (600, 0)

What does the slope of the PPF tell us?

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Constant Opportunity Cost

1 2 3 4SOYBEANS, S (millions of bushels per year)

1

2

3

5

4

TE

XT

ILE

S, T

(mill

ions

of y

ards

per

yea

r)

America’sPPF

1

Britain’sPPF

4

a'

b

a

A’s opportunity cost:2 bushels S costs 1 yard T,|slope| = 0.5 yd./bu.

B’s opportunity cost:1 bushel S costs 3 yards T,|slope| = 3 yd./bu.

b’

Who has CA in S? … in T?Can they gain from trade?

Increasing Opportunity Cost

SOYBEANS, S (millions of bushels per year)

6

18

40 8 12

12

2

14

20

6 millionyards S

6 million bushelsof T

a'Opportunity costof 1 bushel of S is1 yard T,|slope| = 1 yd./bu.

TE

XT

ILE

S, T

(mill

ions

of y

ards

per

yea

r)

America’s PPF

2 millionbushels of S

Increasing Opportunity Cost

6

24

40 8 12

30

36

15

7 9

18millionyardsof T

a

Opportunity costof 1 bushel of S is 9yards of T, |slope| = 9 yd./bu.

TE

XT

ILE

S, T

(mill

ions

of y

ards

per

yea

r)

SOYBEANS, S (millions of bushels per year)

Britain’s PPF

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PPFs for two individuals

0

200

400

600

800

1000

1200

1400

0 200 400 600 800 1000 1200 1400Fish (lbs/yr)

Coc

onut

s ( b

u./y

r.)

Rob

Guy

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CPF with a price ratio of 1(bu/lb)

0

200

400

600

800

1000

1200

1400

0 200 400 600 800 1000 1200 1400Fish (lbs/yr)

Coc

onut

s ( b

u./y

r.)

Rob's

Guy's production

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If Guy and Rob share equally

0

200

400

600

800

1000

1200

1400

0 200 400 600 800 1000 1200 1400Fish (lbs/yr)

Coc

onut

s ( b

u./y

r.)

Rob's

Guy's production

Both could eat (600,600)

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Why Do Nations Trade?

Absolute Advantage:A nation (individual) is said to have an absolute advantage in producing a good when it can produce that good ____________________. This greater efficiency in production is due to superior technology.

Smith thought this explained trade patterns.

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Comparative Advantage:

A nation (individual) is said to have a comparative advantage in producing a good when it can produce that good __________ __________________________________.

Ricardo -- differing technologiesHeckscher-Ohlin -- differing resource

endowments

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Concepts and the PPF

ScarcityNecessity of ChoiceOpportunity CostEconomic Growth

Due to an increase in resources• Capital, Labor & Land

Due to technological progressInternational Trade (many applications)

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Classifying Economic Systems

Who makes decisions? Centralized or Decentralized

Who owns which resources? individuals or the state

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Communism v. Capitalism

Communism entails state ownership and centralized decision making

Pure capitalism implies private ownership and decentralized decision making

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Private Property Rights

Fee-Simple property rights are broadest use the good as you choose, as long as you

violate noone’s rights trade or give these rights to anyone or deny others the right to use a good

Most argue that property rights are determined by law.