What is economics? This article explains the definition of economics and the fundamental assumptions held in order to produce economic models.
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Welcome to Simply Economics. This article is the first in a series to explain economics to those who want to start to understand the subject.
The Nature of Economics.
Economics is a social science, which means it studies human behaviour. Economics looks at how limited resources are allocated to meet the unlimited needs and wants of a human.
In order to improve the understanding of the behaviour of consumers and producers, 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 important 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 how much a good/service is demanded. To isolate the price factor, it is assumed that all other factors that affect demand remain constant. Therefore, it simplifies the model.
The Purpose of Modelling
The terms theory and models are used interchangeably. There is no difference between the two. Theories and models are extremely useful in economics because they help simplify the complex actions and behaviour of humans.
Similarly, in economics, theories and models are used in order to help us understand and predict the behaviour of consumers and producers which have effects on the economy.
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