ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Neo-classical economics employs 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, and people act independently on the basis of full and relevant information.

Detailed explanation-2: -Economists make a variety of assumptions when designing models. A basic starting point for some economic models can be assuming unlimited wants and unlimited resources. Such assumptions help to better understand the decisions of individuals, such as in the economic concept of utility.

Detailed explanation-3: -Economic models generally consist of a set of mathematical equations that describe a theory of economic behavior. The aim of model builders is to include enough equations to provide useful clues about how rational agents behave or how an economy works (see box).

Detailed explanation-4: -The key assumption of economics (especially microeconomics) is that “individuals allocate their scarce resources so as to make themselves as well off as possible.” This assumption is central to economics; there is an “economic way of thinking” that is different and distinct from the methods of other social sciences.

Detailed explanation-5: -Reasons why economists use assumptions in their economic models: Helps to simplify analysis – helps to make the complex less daunting. Assumptions highlight the problem under investigation. Help economists to use maths in quantifying effects.