What is the fallacy of composition? Give an example of a misconception in economics which results from this fallacy.

The fallacy of composition is a logical error that occurs when the properties of individual parts are wrongly assumed to apply to the whole. In other words, when one infers that something is true for the whole group based on the fact that it is true for a part of that group, it may result in the fallacy of composition.

One of the most common misconceptions in economics that arises from the fallacy of composition is the belief that if an individual saves more money, then the nation as a whole will save more money. This idea may seem logical, but it overlooks the fact that when many people save more, spending decreases, which may lead to decreased production and fewer jobs. This, in turn, could result in lower overall savings for the entire population.

For example, consider a situation where each individual in an economy decides to save more money and reduce their spending due to economic uncertainties. While this might be beneficial for each person in the short run, when everyone saves more and spends less, the overall demand for goods and services will decrease. Lower demand will lead to lower production, companies earning less, and potentially cutting jobs or wages. As a result, people may actually end up with less income to save, ultimately leading to lower total savings for the entire population. In this case, the fallacy of composition has led to a misconception that saving more money at an individual level will automatically result in higher savings for the entire economy.