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2. Avoiding the fallacy of composition. The fallacy of composition is the idea that what is true
for one must be true for the group. This is not necessarily true. If one person leaves the
football game at the end of the third quarter in order to exit the parking lot faster, that one
person will be able to exit faster. If all the fans leave the football game at the end of the third
quarter, the group will not be able to exit the parking lot faster. Likewise, an economic policy
that benefits one person or a small group may not be beneficial to society as a whole.
Example 15: A tariff on imported widgets would benefit domestic widget manufacturers and their
employees. But, as we will see in Chapter 16, the tariff would have a harmful effect overall on the
domestic economy.
3. Avoiding the zero-sum fallacy. The zero-sum fallacy is the idea that one party to a market
transaction can gain only if the other party loses. Some activities are zero-sum games; the
money that one poker player wins comes at the expense of the poker player who loses. But
voluntary market transactions are positive-sum games. When two parties voluntarily engage in
a trade, they both expect to benefit from the trade.
Example 16: If Vincenzo buys a used road bike from Lance for $800, Vincenzo must value the
road bike more than his best alternative use of the money, and Lance must value the money that
he is receiving more than the road bike. Both parties expect to benefit from the trade, or they
would not voluntarily trade.
4. Avoiding the free lunch fallacy. Given the basic economic problem of scarcity, “there is no
such thing as a free lunch”. Economic decision-making requires a consideration of the tradeoffs
involved. Producing a good requires the use of scarce resources that have alternative
uses, in other words, an opportunity cost.
Example 17: Setting aside urban land for a public park creates a benefit. But it also creates an
opportunity cost; the best alternative use of the land. If the best alternative use of the land is more
beneficial than the public park, then society incurs a net loss from using the land for a park.
5. Distinguishing between positive statements and normative statements. Positive
statements claim to describe the way things are. Positive statements can be tested for
accuracy. Normative statements propose the way things ought to be. Normative statements
express value judgments, and cannot be tested for accuracy.
Example 18: “The use of pesticides increases farm productivity” is a positive statement. “Farmers
should not be allowed to use pesticides on crops intended for human consumption” is a normative
statement.
6. Assuming ceteris paribus when examining the relationship between variables. Ceteris
paribus (k´ ter is - pair´ u bus) means “all other things held constant”.
Example 19: If we want to know what will happen to the quantity of donuts demanded when the
price of donuts increases, we must assume that the change in price is the only change affecting
the quantity demanded. If another variable is also changing, such as consumer income, then the
relationship between price and quantity demanded will be uncertain. Other variables must be held
constant if we are to determine the actual relationship between the variables that we are
examining.
7. Realizing that people respond to incentives. An incentive changes the benefit or cost
associated with an action. Rational people, pursuing their own self-interest, will respond to
incentives. (Refer back to Example 8 on page 1-3. Also, see the appendix on the Rational
Person Assumption at the end of the chapter.)
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8. Trying to anticipate unintended consequences. Actions are taken in hopes of achieving a
desired outcome. But unintended consequences may also result. The unintended
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