BASIC ASSUMPTIONS IN ECONOMICS
It is seen above that economic laws arc governed by the phrase other things being equal. This means that , while reasoning out economic phenomena, we take certain things for granted, These arc the various assumptions that underlie economic reasoning.
There arc three broad Assumption i, The first group of individuals consumers, proud etc. For instance, we assume that the in a rational manner and check maximum That there is mobility of labor In of wages and the entrepreneurs check maximum .This is known as the maximization principle.Joan Robinson’s words.The fundamental assumption of economic analysis is that ever} individual acts in sensible manner and II is sensible for the individual to balance marginal met and marginal gain.This sensible conduct results in maximization or money gains. Actually the principle may not work, Out, in order to simplify things, we have to assume all these things:
It is further assumed that tic consumers’ tastes remain unchanged for fairly long periods or time. That is, they do not suddenly change the components of their diet or their mode of dress, For instance, a vegetarian remains a and a person continues wearing Indian dress. In other words, we assume ‘economic rationality’ both on the part of consumers and businessmen. .We take the economic man’ as our basis of discussion who I. a sort of average of an abstraction real men’ living in society. The assumption that the seek maximum vacuousness out of the money they spend is fairly.
Then there is the assumption of feet competition on which the working competitive economy stands, It is assumed Hail there is a large number of buyers and sellers in the market, the commodity is homogeneous, in character, that there IS perfect knowledge and perfect mobility of resources and that none of the individual buyers and sellers arc in a position to influence price, These assumptions arc obviously unrealistic and do not hold good in the world of reality.
There is still another assumption which lies .at the basis of economic analysis i.e., the concept of equilibrium. Equilibrium refers to a situation .In which no departure is desired. It is a. point of rest i.e., where a consumer is supposed to have attained maximum and an entrepreneur maximum profit. We discuss consumers’ equilibrium, equilibrium of the fin and industry. A firm is said to be in equilibrium when it is making maximum profit and an industry is in equilibrium when it gives only normal profit. When these positions have been attained, there is no incentive to make any change.
A student of economics will also observe that most of the statements of economic laws arc preceded or end with the phrase ‘other things being equal’ or cerise pan. This means that the law will hold good if there arc 110 other changes taking place at the same time in the related economic phenomena. That is, economic laws arc based Oil the assumption of ‘no other change. Actually, the world is dynamic and changes arc simultaneously taking place. But this assumption isolates a particular change and thus facilitates understanding of the principles under discussion.