Lecture 2.ppt

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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 vice-
  versa).


                                             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
List the coordinates of the points
                                  A:(__,___)       B:(___,____)
                       1000
Beef (mill. lb./yr.)




                        900
                        800
                                                                     C:(___,___)
                        700
                        600
                        500
                        400
                        300
                        200
                        100
                                                                                     D
                          0
                              0       100       200      300       400     500     600
                                               Tax Forms (millions/yr)

                                                                                     17
  Find the slope of each segment.
  Include the units.
                                    A:(0,1000)        B:(200,950)
                         1000
  Beef (mill. lb./yr.)




                          900
                          800
                                                                           C:(400,700)
                          700
                          600
                          500
                          400
                          300
                          200
                          100
                                                                                    D: (600, 0)
                            0
                                0      100       200     300       400        500        600
                                                 Tax Forms (millions/yr)

 What does the slope of the PPF tell us?                                                         18
Constant Opportunity Cost
                                            5
                                                     A’s opportunity cost:             B’s opportunity cost:
 TEXTILES, T (millions of yards per year)

                                                     2 bushels S costs 1 yard T,       1 bushel S costs 3 yards T,
                                            4   b    |slope| = 0.5 yd./bu.             |slope| = 3 yd./bu.


                                                                                   Who has CA in S? … in T?
                                            3                                      Can they gain from trade?
                                                            Britain’s
                                                            PPF
                                            2
                                                                        a
                                                            b’
                                            1
                                                America’s
                                                PPF                                               a'

                                                       1                2          3              4
                                                       SOYBEANS, S (millions of bushels per year)                    19
Increasing Opportunity Cost
                                                 6 million bushels
 TEXTILES, T (millions of yards per year)


                                                 of T
                                                                            Opportunity cost
                                            20              a'              of 1 bushel of S is
                                                                            1 yard T,
                                            18                              |slope| = 1 yd./bu.

                                            14
                                            12
                                                            6 million
                                                            yards S
                                             6                                     America’s PPF

                                             0    2     4               8              12
                                                                        SOYBEANS, S (millions of bushels per year)
Increasing Opportunity Cost

                                            36
 TEXTILES, T (millions of yards per year)




                                            30
                                                                            Opportunity cost
                                                                            of 1 bushel of S is 9
                                            24                              yards of T,
                                                 18million
                                                 yards                      |slope| = 9 yd./bu.
                                                 of T
                                            15                      a
                                                                             Britain’s PPF
                                                  2 million
                                             6    bushels
                                                  of S

                                             0        4       7 8       9          12
                                                                SOYBEANS, S (millions of bushels per year)
PPFs for two individuals
                      1400
Coconuts ( bu./yr.)




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

                                                                                   22
CPF with a price ratio of 1(bu/lb)
                             Guy's production
                      1400
Coconuts ( bu./yr.)




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

                                                                                     23
If Guy and Rob share equally
                             Guy's production
                      1400
Coconuts ( bu./yr.)




                      1200
                      1000
                                                          Both could
                      800                                 eat (600,600)
                      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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