Why Do Economists Make Assumptions?

Why Do Economists Make Assumptions

Economists and their assumptions are inseparable. You may even be wondering why they often use these assumptions, given that they are sometimes far from real-world scenarios. However, many of these assumptions have yielded remarkable results that shaped nations economically. It might also interest you to know that some economists have used their assumptions to proffer solutions to real-world problems. It may start as a hypothesis and end as an economic theory.

Alright, here’s the answer to “Why do economists make assumptions?”

First, understand that an economist cannot assume things for the fun of it. He or she does so to make simple the various economic processes. The assumptions also make it super easy to study and develop a better understanding of those economic processes. Assumptions offer an economist the tool to break down complex processes. Thus, making the development of any theory much simpler and improve one’s realm of understanding.

So that’s it about why economists usually make assumptions. Read to get more information regarding this topic!

Understanding Why Businesses And Economists Make Assumptions

This post will help to breakdown the meaning of economic assumptions for everyone to understand. The explanation should also help to answer any possible question you may have with regards to economic assumptions.

Now let’s use this simple analogy. The one thing companies pay the most attention to is their business’s performance. Even if their service or product niche is highly competitive, most of them still somehow find ways to present catchy figures that can inspire investors to dip their hands in their pockets.

The figures might just be mere assumptions to create an idea that the future is bright for the business. No business would create a negative projection or assumption concerning their performance because doing that will not only hurt the company. It can also create a not-so-good feeling among potential investors.

Economists can assume things or the economic situation of a business, country, or region for numerous reasons. It may be to motivate a specific group of people, nation, or business to put in more effort or maintain the same standard to achieve particular projections or goals. It may also be to prove a point or propose a specific theory.

So, economists might create assumptions to indicate that the economic situation would come out good or bad over a specific period. And those assumptions, as the case may be, will help to show how upcoming projects or plans will feel the impact.

Let’s take a look at what assumptions mean.  Assumptions are things one might assume are right or wrong, even in the absence of proofs. For example, some individuals might think that you are a nerd, only because you have a glass on, although that’s not the case on your part.

Here’s an answer to what economic assumptions are. Take a look at this simple explanation. A company might decide to make general assumptions regarding the market environment. Every company has a financial plan, so they may likely make those assumptions on the environment they wish to operate during that period in time. Also, this assumption may lie massively on the proposed state of the economy in no distant time.

Assumptions may prove helpful to business, although it has its positives and negatives. However, when a company makes predictions, they try to foretell what the business environment might become and how it might affect their capacity to make a profit over that period.

The building of economic models stems from assumptions. Economists cannot deliver these models without them. In most cases, the assumptions might be about the level of competition they are facing or likely to face in the future. And this also includes the level of marketing. Furthermore, the exciting thing about these economic models is that many of them assume those regarded as players in the market have the right information concerning their varied choices.

Assumptions Economists Make: Basic Examples

You may have heard about the various assumptions economists make and have seen them in materials related to the field, economics. Most of these assumption examples have been in existence for long periods, too. So, below are regarded as the assumptions used in economics.

  • Society does have unlimited wants, and resources are scarce (unlimited).
  • Choices must be made due to scarcity.
  • Everyone’s priority involves the making of choices that would maximize their satisfaction.
  • Every individual makes their decisions via a simple comparison of marginal costs and benefits of all known choices.

Let’s look deeply at the above assumptions. A couple of details on each would provide a much better understanding.

Scarcity

Another word for scarcity is “limitation.” It means the absence or lack of resources. These include raw materials, goods, varied components, including other scarce supplies. However, we all are living in a society where human wants are unlimited.

But there goes a critical problem for economists. They claim there are limitless human wants where the market comprises of resources that are not limitless.

Graphs and models

Graphs and models are synonymous with economics. In other words, there’s hardly any economic analysis that comes without a chart.

Economists have not only mastered the act of using models and graphs to provide thought-provoking explanations of real-life situations. They also use models and graphs to analyze these situations to proffer solutions to challenges.

Trade-off

Economists assume that humans have limitless wants, where scarcity exists. And as a result, it’s impossible to satisfy each of our wants, making it a necessity for us to make choices. But when we decide on one particular thing, we are invariably trading that something else for that specific thing.

What this simply means is that every choice we make in life comes with a cost. And that cost is what we call “trade-off.”

However, the opportunity cost, which implies the value of what one might miss out on for making a particular decision, needs to be analyzed. In other words, you have to figure out what you are unknowingly forgoing before making a choice.

Self-interest

Do you believe we humans do act in our self-interest most of the time? Well, believe it or not, we do! Our goal or top priority is to make choices that would lead to the maximization of our satisfaction. What this implies is that we always have our self-interest at heart in whatever we do.

Costs and benefits

Before making decisions, we tend to compare the benefits and costs before going ahead. We also make our choices by first comparing both marginal costs and benefits. And this cost-benefit analysis helps us to make decisions we may consider appropriate for the situation.

The Beneficial Effects Of Economic Assumptions

Many critics are against the use of assumptions by economists to address real-life problems. But before we jump into that, let’s consider the impact economic assumptions can have.

So the question is, do economists make real sense out of their numerous assumptions? Here’s the answer to this question.

Assumptions help economists to help us. If you study economics, then you will have a better understanding of this claim. Assumptions make it possible for an economist to simplify varied economic processes. Thus, making them super easy for everyone to study and have a better understanding of, irrespective of their intellectual capacity. They make the breaking down of complex processes possible, leading to the development of theories

Here’s an example. One assumption economists make is that people are not only rational but tend to maximize all their utilities. It’s an assumption, but this simple assumption has proven helpful in many ways. First, it has made it possible for economists to develop a structure, which would enable them to have a better understanding of how individuals make their choices and utilize resources.

But then, in the real sense, we humans act differently from one another.

The Criticisms Of Using Assumptions Economists Make

Every theory ever postulated faces criticism. Without these critics, we may not view the other side of specific claims but, instead, continue to see them as the real deal. Understandably, assumptions simplify complex scenarios to make it easier for economists to study and transfer knowledge, but their usage has drawn several criticisms.

So what are criticisms on the use of economic assumptions? Well, critics are of the view that assumptions are making economists rely excessively on information that is unverifiable, unrealistic, and simplified. There are also myriads of such assumptions that critics have taken into account.

These include assumptions like profit maximization, rational choices, and perfect information. These assumptions don’t always hold. So when theories are based on them, an economist can expect a backlash from critics. Critics believe that these assumptions, though simplified, are unrealistic and can’t be used in complex real-world scenarios.

Conclusion 

Economists make assumptions for diverse reasons. One is to breakdown processes that are too complex to understand. Assumptions can also help economists to propose economic models that are super easy to study and understand. Nevertheless, in as much as these assumptions have varied benefits, they have also attracted several criticisms. This post provides a detailed explanation of the examples of assumptions, advantages, and critiques. I hope you had a great time reading it? Thanks for stopping by!