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January 18, 2018 

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LIMIT PRICING: The strategic behavior process in which a firm with market control sets its price and output so that there is not enough demand left for another firm to enter the market and earn profits. The firm expands its output causing the price to fall, which discourages potential entrants to this market. This practice is most commonly undertaken by oligopoly firms seeking to expand their market shares and gain greater market control.

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CAUSE AND EFFECT:

The notion that every event in the universe is the direct result of a preceding event, that one event A causes another event B. The purpose of the scientific method is to identify these cause-and-effect relations. This pursuit is based on a simple point of view: everything happens for a reason. For every action there is a consequence. And for every consequence there is a cause.
Science is the process of identifying cause and effect connections between events, or what are more commonly termed the laws of nature. These connections form the complex machinery that makes up the world. Event A causes event B, which causes event C, which causes event D, etc.

Consider the market for hot fudge sundaes.

  • An increase in buyers' income causes an increase in the demand for hot fudge sundaes.

  • The increase in the demand for hot fudge sundaes causes a shortage of hot fudge sundaes.

  • The shortage of hot fudge sundaes causes the price of hot fudge sundaes to rise.

  • The increase in the price of hot fudge sundaes causes an increase in the quantity supplied and a decrease in the quantity demanded of hot fudge sundaes.

  • The increase in the quantity supplied and a decrease in the quantity demanded of hot fudge sundaes causes the shortage to be eliminated.
Event A causes event B, which causes event C, which causes event D. Knowing each cause-and-effect relation makes it possible to analyze what happens to the market for hot fudge sundaes when buyers have more income.

What About Magic?

The scientific method is built on the presumption that the world is governed by cause and effect. But is it? Might the world operate according to other "rules?" What about magic? Event A does not cause event B? Event B just happens... by magic?

This could happen. The world could work in this way. If so, it would throw every bit of scientific inquiry into the trash dumpster. And it would create massive unemployment among scientists (including economists).

Maybe the earth does not revolve around the sun, but the sun appears in the sky each morning by magic. Maybe the price of hot fudge sundaes does not increase due to a shortage, but it rises because of magic. Maybe magic, not the laws of nature, creates federal deficits, unemployment, earthquakes, and solar flares.

While the presumption of a world operating according to magic is an alternative to cause and effect that might appeal to some folks, it does not provide a great deal of insight into the actual workings of the world.

Correlation

The first step in discovering cause-and-effect links is to understand the general role of correlation. If event A causes event B, then event A is correlated with event B. That is, every time event B happens, then event A also happens. If event A causes event B, then A and B are correlated.

Fallacy of False Cause

While correlation is the first step on the road to causation, correlation alone does not always mean causation. Two events can be correlated, without one causing the other. Mistakenly thinking that correlation necessarily means causation creates the fallacy of false cause. Suppose, for example, that it seems to rain the first day of every school year. Does this mean rain causes the start of school? Does the start of school cause rain? Unlikely on both counts! These events are correlated, but one does not necessarily cause the other. Each is likely caused by something else.

Time

While correlation gives scientists a place to begin when identifying cause and effect, a close look at time (proximity and sequence) helps.
  • Time Proximity: For A to cause B, event A and event B must happen at about the same time. That is what proximity means. For the start of school to cause rain, the rain must occur soon after the start of school. If the rain occurs weeks or months later, then the true cause is something other than the start of school.

  • Time Sequence: In addition, for A to cause B, then event A must occur before event B. If event B occurs first, then it cannot be caused by event A. That is what sequence is all about. The rain must occur after the start of school. If the rain comes first, then rain cannot be caused by the start of school.

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Recommended Citation:

CAUSE AND EFFECT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 18, 2018].


Check Out These Related Terms...

     | principle | law | hypothesis | assumption | empirical | phenomenon | theory | verification | world view | model |


Or For A Little Background...

     | scientific method | abstraction | science | economic science | fallacy of false cause | positive economics |


And For Further Study...

     | fallacies | economics | seven economic rules | scarcity | dismal science | graphical analysis | economic analysis |


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