What is economics? This article will go on to explain what economics is and the fundamental assumptions held in order to produce economic models.
Welcome to your Simply Economics. This article is the first in a series to explain and economics to those who want to start to understand the subject.
The Nature of Economics.
Economics is a social science, which means it is concerned with the study of human behaviour. It investigates how scarce resources are allocated to meet the unlimited needs and wants of a human.
In order to improve the understanding of consumer and producer behaviour economists develop models which hold assumptions. These assumptions are key to simplifying the erratic behaviour of humans.
The assumptions held are as follows;
1) Consumers aim to maximise satisfaction and utility on expenditures.
2) Producers aim to maximise profits from the goods and services they sell.
3) Ceteris Paribus.
What is Ceteris Paribus?
When thinking like an economist, it is imperative to use the assumption of Ceteris Paribus. This means 'all other things being equal/remaining the same'. The assumption is crucial as economists cannot test models in a scientific manner.
An example of Ceteris Paribus is in Demand Theory, economists study how price affects the quantity of a good/service is demanded. In order to isolate the price factor, it is assumed that all other factors that affect demand remain constant. Hence, simplifying the model.
The Purpose of Modelling
The terms theory and models are used interchangeably. There is no distinction to be made between the two. Theories and models are extremely useful in science because although there are millions of interactions occurring at any given moment we still have understanding of what is going on. For example, we assume that if we put our hands in fire we will get burnt.
Similarly in economics, theories and model are adopted in order to help understand and predict the behaviour of consumers and producers which have effects on the economy.
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