ASSUMPTIONS

IN
ECONOMICS
GROUP 3
Vallentos
Manaytay
Dungog
Dema-ala
Pama
Villahermosa
Diohang
An assumption is a statement that is presumed to
be true without concrete evidence to support it. In
the business world, assumptions are used in a wide
variety of situations to enable companies to plan
and make decisions in the face of uncertainty.
What are assumptions in economics?
Assumptions are initial conditions made before a
micro or macroeconomic analysis is built.
Sometimes assumptions are used for simplification
Assumptions can be used to isolate the effects of a
change in one variable on another
Many assumptions are criticised for being unrealistic
Benefits of Economic Assumptions
Assumptions provide a way for economists to simplify
economic processes and make them easier to study
and understand. An assumption allows an economist
to break down a complex process in order to develop
a theory and realm of understanding. Good
simplification will allow the economists to focus only
on the most relevant variables. Later, the theory can
be applied to more complex scenarios for additional
study.
For example, economists assume that individuals are
rational and maximize their utilities. This simplifying
assumption allows economists to build a structure to
understand how people make choices and use
resources. In reality, all people act differently. However,
using the assumption that all people are rational
enables economists study how people make choices.
What is the ceteris paribus assumption?
To simplify analysis, economists isolate the
relationship between two variables by assuming ceteris
paribus – i.e. all other influencing factors are held
constant
For example - when considering the demand for a
product such as electric vehicles, we might focus on
the effects of changes in the price of the product
itself, whilst isolating the impact of changes in factors
such as real incomes of consumers, interest rates on
loans to finance a car purchase and many other
variables.
5 key economic assumptions
-Society has unlimited wants and limited resources
(scarcity)
-Due to scarcity, choices must be made. ...
-Everyone's goal is to make choices that maximize
their satisfaction. ...
-Everyone makes decisions by comparing the marginal
costs and marginal benefits of every choice.
-Real-life situations can be explained and analyzed
through simplified models and graphs.
Assumptions provide a way for economists to
simplify economic processes and make them easier
to study and understand. An assumption allows an
economist to break down a complex process in
order to develop a theory and realm of
understanding.