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 human behavior (Figure 1).
Neo-classical economics works with three basic assumptions:
- People have rational preferences among outcomes that can be identified and associated with a value.
- Individuals maximize utility and firms maximize profit.
- 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.