lecture 3

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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, 10
In the 8am section, we
further examined deductive
and inductive arguments.
1
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.
2
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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
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.
9
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)
10
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.
11
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.
12
Variants of the False-Cause
Fallacy
 Post 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 viceversa).
13
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.
14
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.
15
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.
16
Beef (mill. lb./yr.)
List the coordinates of the points
A:(__,___)
1000
900
800
700
600
500
400
300
200
100
0
B:(___,____)
C:(___,___)
D
0
100
200
300
400
Tax Forms (millions/yr)
500
600
17
Beef (mill. lb./yr.)
Find the slope of each segment.
Include the units.
A:(0,1000)
1000
900
800
700
600
500
400
300
200
100
0
B:(200,950)
C:(400,700)
D: (600, 0)
0
100
200
300
400
Tax Forms (millions/yr)
500
 What does the slope of the PPF tell us?
600
18
Constant Opportunity Cost
TEXTILES, T (millions of yards per year)
5
4
b
A’s opportunity cost:
2 bushels S costs 1 yard T,
|slope| = 0.5 yd./bu.
3
B’s opportunity cost:
1 bushel S costs 3 yards T,
|slope| = 3 yd./bu.
Who has CA in S? … in T?
Can they gain from trade?
Britain’s
PPF
2
1
b’
a
America’s
PPF
1
a'
2
3
4
SOYBEANS, S (millions of bushels per year)
19
TEXTILES, T (millions of yards per year)
Increasing Opportunity Cost
6 million bushels
of T
20
18
Opportunity cost
of 1 bushel of S is
1 yard T,
a'
|slope| = 1 yd./bu.
14
12
6 million
yards S
6
0
America’s PPF
2
4
8
12
SOYBEANS, S (millions of bushels per year)
TEXTILES, T (millions of yards per year)
Increasing Opportunity Cost
36
30
24
Opportunity cost
of 1 bushel of S is 9
yards of T,
18million
yards
of T
|slope| = 9 yd./bu.
a
15
Britain’s PPF
6
0
2 million
bushels
of S
4
7 8
9
12
SOYBEANS, S (millions of bushels per year)
Coconuts ( bu./yr.)
PPFs for two individuals
1400
1200
1000
800
Guy
600
400
Rob
200
0
0
200
400
600
800
1000
1200
1400
Fish (lbs/yr)
22
Coconuts ( bu./yr.)
CPF with a price ratio of 1(bu/lb)
1400
Guy's production
1200
1000
800
600
400
200
Rob's
0
0
200
400
600
800
1000
1200
1400
Fish (lbs/yr)
23
Coconuts ( bu./yr.)
If Guy and Rob share equally
1400
Guy's production
1200
1000
Both could
eat (600,600)
800
600
400
200
Rob's
0
0
200
400
600
800
1000
1200
1400
Fish (lbs/yr)
24
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.
25
Comparative Advantage:
 A nation (individual) is said to have a
comparative advantage in producing a good
when it can produce that good __________
__________________________________.
 Ricardo -- differing technologies
 Heckscher-Ohlin -- differing resource
endowments
26
Concepts and the PPF




Scarcity
Necessity of Choice
Opportunity Cost
Economic Growth

Due to an increase in resources
• Capital, Labor & Land

Due to technological progress
 International Trade (many applications)
27
Classifying Economic Systems
 Who makes decisions?


Centralized or
Decentralized
 Who owns which resources?


individuals or
the state
28
Communism v. Capitalism
 Communism entails state ownership and
centralized decision making
 Pure capitalism implies private ownership
and decentralized decision making
29
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.
30
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