Fallacy of Composition: A Keynesian Cross in the Consumer Choice
Come to think of it, there in the corner of economics is a hidden cross, utile or useless. The Cross in Consumer Choice. For the purpose of giving some sense to the so-claimed “price” of x good ( p x ) in the consumer choice model, certain economists put the budget for “all the other goods” on the y axis (e.g. Samuelson and Nordhaus 2010, p.88; Hal Varian 2010, p.114). In this case, the total household income becomes the budget constraint. Alas, they fall prey of fallacy of composition Paul Samuelson talked about as early as in 1948 ( Economics , p.9). Suppose apples on the x Axis of John Doe’s coordinate, and the weekly income on the Axis of y . Further suppose that the apple sells @ $0.5 and that Doe’s income, or spending budget, for all purposes is $5,000. Question 1 : How many units of apples could Doe buy per week,...