Economists use assumptions in order to simplify economics processes
so that they are easier to understand.
LEARNING OBJECTIVE [ edit ]
Assess the benefits and drawbacks of using simplifying assumptions in economics
KEY POINTS [ edit ]
Neo-classical economics employs three basic assumptions: people have rational preferences
among outcomes that can be identified and associated with a value, individuals
maximizeutility and firms maximize profit, and people act independently on the basis of full and
relevant information.
An assumption allows an economist to break down a complex process in order to develop a theory
and realm of understanding. Later, the theory can be applied to more complex scenarios for
additional study.
Critics have stated that assumptions cause economists to rely on unrealistic, unverifiable, and
highly simplified information that in some cases simplifies the proofs of desired conclusions.
Although simplifying can lead to a better understanding of complex phenomena, critics explain
that the simplified, unrealistic assumptions cannot be applied to complex, real world situations.
TERMS [ edit ]
assumption
The act of taking for granted, or supposing a thing without proof; a supposition; an
unwarrantable claim.
simplify
To make simpler, either by reducing in complexity, reducing to component parts, or making
easier to understand.
Give us feedback on this content: FULL TEXT [edit ]
As a field, economics deals with complex
processes and studies substantial amounts
of information. Economists use
assumptions in order to simplify economic
processes so that it is easier to understand.
Simplifying assumptions are used to gain a
better understanding about economic
issues with regards to the world and
Good Y
human behavior .
I1
I2
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I3
Good X
Simple indifference curve
An indifference curve is used to show potential demand patterns. It is an example of a graph that works
with simplifying assumptions to gain a better understanding of the world and human behavior in
relation to economics.
Economic Assumptions
Neo-classical economics works with three basic assumptions:
1. People have rational preferences among outcomes that can be identified and associated
with a value.
2. Individuals maximize utility and firms maximize profit.
3. People act independently on the basis of full and relevant information.
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.
Criticisms of Economic Assumptions
Although, simplifying assumptions help economists study complex scenarios and events,
there are criticisms to using them. Critics have stated that assumptions cause economists to
rely on unrealistic, unverifiable, and highly simplified information that in some cases
simplifies the proofs of desired conclusions. Examples of such assumptions include perfect
information, profit maximization, and rational choices. Economists use the simplified
assumptions to understand complex events, but criticism increases when they base theories
off the assumptions because assumptions do not always hold true. Although simplifying can
lead to a better understanding of complex phenomena, critics explain that the simplified,
unrealistic assumptions cannot be applied to complex, real world situations.