Economic Fallacies Economic Analysis and Business Decision

Fri, 04/24/2009 - 20:25 -- Umar Farooq

Business economics can be simply viewed as the application of economics for the analysis of business. Business, on the other hand, is an economic activity. There is a need for objectively analyzing structure scope, efficiency and growth of business Economic analysis is done to provide objectivity.  However, indiscriminate application of economics to business analysis can, sometimes, create confusing paradoxes.  These are referred to as Fallacies.  The Business Decisions are taken in the light of Economic Analysis keeping in view the Economic Fallacies.

  1. Economic Fallacies
  2. Economic Analysis
  3. Business Decision

Economic Fallacies

Economic fallacies are listing below:

1. The Fallacy of Composition         

To assume what is true for one part will necessarily be true for the whole is fallacy of composition e.g. saving of all families.  One saves it is good all save sales  unemployment   recession e.g. bumper crop

2.  Post hoc, ergo propter hoc

It is Latin and its meaning is, “After that therefore, because of that”. What follows is result of the preceding.

3. The Fallacy in Syllogism

Syllogism is a particular form of reasoning. It has

Major premise, Minor premise, and Conclusion

For example:        Major premise:          Blind can’t read

Minor premise:         Ali can’t read

Conclusion:              So Mr. Ali is blind

4. Probabilistic vs. Deterministic Inferences

Most generalizations of economic analysis are subject to fulfillment of certain condition called assumptions. One such assumption that dominates economic analysis is “other things remaining the same.” But other things are so diversified that they seldom remain constant. So the conclusions from economic analysis are bound to be probabilistic instead of deterministic.

5. Black, White and Grey   

Fallacy of assuming that there is no middle ground so result is accepted or rejected.

6. Wishing it were So           

We believe the things we want to believe we always accept favorable interpretation of event or a course of action.  This can ruin the analysis.

Economic Analysis

1. Micro Vs Macro Economic Analysis

Micro economic analysis          

Its focus is on individual consumer, producer a firm an industry, as single price a single commodity etc. it is a step by step analysis and analyses one variable at a time other things remaining the same.

Macro economic analysis          

This studies the economy as a whole. Aggregate demand, price, supply etc are its concern.

2. Partial vs. General Equilibrium Analysis

Partial Equilibrium analysis

In partial equilibrium analysis, one part of the system is being analyzed assuming other parts to be constant the interdependence is neglected and the analysis is done in isolation.

General Equilibrium analysis

When partial aquarium is done, other thing are assumed to be constant however, the other things are gradually let to be changing in order to analyze the whole. This is called generally equilibrium.  It takes into account the interdependence of various variables.  But the general equilibrium also, does not the scope of analysis the economic system as a whole.

3. Static, Comparative Static and Dynamic Analysis

Static analysis


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