Principles of Economics with a Guide to Critical Thinking
Critical thinking is an essential skill for any serious economics student. Economic data cannot be analysed without some understanding of logic and human behavior, so critical thinking is an essential part of understanding the principles of economics. The principles of economics fall into three broad categories: how people make decisions, how people interact and how the economy as a whole behaves. The critical thinking skills that apply to economics, therefore, are those that relate to human and organizational behaviors.
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Human Decision Making
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Human behavior is an important topic in economics. Basic economic laws, such as those of supply and demand, are derived from basic premises about human nature: people respond to incentives; people choose profitable trade-offs; people seek to maximize their utility (pleasure); and people weigh costs against benefits. Economists encourage students to avoid logical fallacies when dealing with these concepts. The fallacy of over-generalization might lead one to think that the human tendency to seek profitable trade-offs implies that all people actually obtain profitable trade-offs. Similarly, the post hoc ("after therefore because of") fallacy might lead one to think that everyone is in the position they are in because of the incentives they responded to.
Human Interaction
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Human interaction is related to human decision making. Principles of economics related to human interaction include: Trading with others increases with a person's utility; markets facilitate trading; and government intervention can curb some of the excesses of trade. The circular reasoning fallacy could lead one to think that a free market increases utility because free markets facilitate trade. The slippery slope fallacy could lead one to think that government intervention will lead to more government intervention. The post hoc fallacy could lead one to think that because government stimulus was used and the economy subsequently improved, the stimulus improved the economy. It is important to avoid these fallacies when thinking about economic principles.
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Macro Behavior
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Macro behavior is the aggregate effect of the millions of individual behaviors that go on in an economy. Principles of macro behavior include: Living standards rise with the ability to produce goods and services; prices rise when the government prints too much money; and society faces a trade-off between inflation and unemployment. Fallacies can distort one's understanding of these principles. The association fallacy, for example, could lead one to think that because a person's living standards rose, he must be working in a productive economy.
Other Principles
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There are many general mathematical principles in economics, particularly microeconomics. These principles include: Prices rise as supply falls; prices fall as demand falls; percentage returns decrease as total returns increase; and a financial asset has one equilibrium price in an efficient market. Understanding of these principles can be distorted by sloppy logic. The over-generalization fallacy could lead one to think that the laws of supply and demand imply that market prices are always justifiable, for example.
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References
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