Assumptions in Economics - Revision Video

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

In your revision – highlight examples when an assumption is mentioned in your notes

Challenging an assumption can be a really effective way to evaluate in an essay

Examples

Rational decisions

The assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases.

Challenges:

• Many consumers show bounded rationality
• There may not be enough information or time to make fully-informed, rational decisions
• The limits of the human brain to process every piece of information and consider every single possibility 

Independent agent choice

Traditional economics assumes that people make choices independently of one another. 

Challenges:
Behavioural economists believe that most decisions are taken in a social context within social networks. Individuals are influenced by social preferences, identities, and norms. Many people imitate the behaviour of others almost automatically.

Profit Maximisation

A monopolist is assumed to profit maximise, in other words, aims to find an output where MC=MR. At this equilibrium output, marginal profit is zero.

Challenge:
There are many possible objectives for a business including sales revenue maximisation and growth maximisation