The Myth of Backward-Bending Curves: Micro-Events in Macro-Models

Abstract

Most authors give, in the beginning of their elementary textbook, a warning to readers against confusion between movements on versus shifts of the demand and supply curves. Oddly, later on in the same book they themselves fall in the very trap of such confusion. The so-called Giffen good and backward-bending labor supply should, if ever, be explained as a shift in the relevant curve rather than backward-bending in the market model. Even more oddly, such popular mistakes are caused by forgetting the elementary fact that every scientific model has its own assumptions that are often invalidated in other models. The assumptions for the production possibility frontiers and the indifference curves, which are the mothers of the backward bending curves, are completely different from those in the market model. Therefore, such curves are merely outcomes of fallacy of composition, namely, the mistake of explaining micro-events using macro-models.