ECON 0110 1st Edition Lecture 2In today’s lecture, we talked about three common errors in economic reasoning, four types of decision making and the differences between public goods and private goods.COMMON ERRORS IN ECONOMIC REASONINGFALLACY OF FALSE CAUSE:post hoc, ergo propter hoc“after this, therefore because of this”FALLACY OF COMPOSITION:What holds for one person does not necessarily hold for everybodyEXAMPLE: THE PARADOX OF THRIFTCETERIS PARIBUS FALLACYThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.The other things being equal fallacyTHEORY:Cet. par., an increase in interest rates will lead to decreased borrowing.THEORY:Ceteris paribus, if gasoline prices increase, people will switch to smaller carsECONOMIC DECISION MAKERS1. Households（consumer（2. Business firms3. Governments4. Foreigners1. HOUSEHOLDSGoal: Maximize their UTILITYUTILITY = level of satisfaction, sense of welll-being, overall happiness（welfare（Households act in their own RATIONALSELF INTERESTPeople choose actions which they perceive to be in their own bestinterestsMeaning of rational:For a given cost, they try to maximize the benefitsFor a given benefit, they try to minimize the cost2. FIRMSGoal: maximize profitsMain types of business firmsSole proprietorsPartnershipsCorporations3. GOVERNMENTSWhy do we need any government interference in the economy?1. Protect private property (police)2. Enforce contracts (judicial system, courts of law)3. Promote competition4. Regulate natural monopolies (electricity, water)5. Provide PUBLICGOODS6. Deal with EXTERNALITIES7. Promote MACROECONOMICGOALS8. Provide for the disadvantaged and disabledPRIVATE GOODS VS. PUBLIC GOODSPrivate goods are RIVAL in CONSUMPTIONThe amount consumed by one person is not available to othersPrivate goods are EXCLUSIVE in SUPPLYThe SUPPLIER can exclude people who do not payEXAMPLE: PizzaPUBLIC GOODSNON-RIVAL in CONSUMPTIONOne person’s benefit does not diminish the amount available to othersNON-EXCLUSIONARY in SUPPLYSuppliers cannot easily prevent consumption by those who fail to pay (FREE RIDERS)National defense, clean air,
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