Microeconomics,, 16th Canadian Edition

(Sean Pound) #1


The economic theories we study in this book make the fundamental
assumption that everyone pursues his or her own self-interest when
making economic decisions. Individuals are assumed to strive to
maximize their utility, while firms are assumed to try to maximize their
profits. Not only are they assumed to know what they want, but we also
assume that they know how to go about getting it within the constraints
they face.

Direction of Causation

When economists assume that one variable is related to another, they are
usually assuming some causal link between the two. Consider a theory
about the market for wheat, for example. When the amount of wheat that
producers want to supply is assumed to increase when the weather
improves, the causation runs from the weather to the supply of wheat.
Producers supply more wheat because the growing conditions improve;
they are not assumed to experience better weather as a result of their
increased supply of wheat.

Conditions of Application

Assumptions are often used to specify the conditions under which a
theory is meant to hold. For example, a theory that assumes there is “no
government” usually does not mean literally the absence of government
but only that the theory is meant to apply when governments are not
significantly affecting the situation being studied.

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