okay welcome to another video we're going to take a look at the concept of an assumption in economics how often have you heard a teacher say well we're making an assumption here if we change the assumptions the model changes it's a key word in your study of economics both in micro and macro so let's take a take a few minutes to think about what the concept means what an assumption is some examples and also how you can challenge an assumption so we're going to take a look look at what our assumptions and in particular we'll take a focus on the ketterous parbus assumption so what is an assumption well an assumption is essentially an initial condition that we make before we start to build either micro or macroeconomic analysis i feel like it's part of the building blocks of a theoretical model often we use an assumption simply for uh to help us simplify a complex bit of analysis so for example we might assume that in a market that the supply curve is perfectly elastic that the cost per unit of each extra unit is exactly the same constant cost assumption that make life might make life a little easier we may also assume that uh make an assumption that isolates the effect of a change in one variable on another the so-called keto is powerful assumption which we'll just refer to in a second or two it's often the case that the the real world doesn't match what you see in your models and many theories are criticized for having unrealistic assumptions particularly for example if we're thinking about the way in which a perfectly competitive market works or the way in which we draw phillips curve analysis for example don't worry too much about the specifics of this point the crucial thing is to be aware that assumptions are there to be tested and often to be criticized that's no bad thing the ketus powerbus assumption or kepa for short is an important one in microeconomics so what is it well to simplify our analysis an economist often isolates the relationship between two variables by assuming keto is purpose in other words what that means is that all other factors that might influence something are held constant to try to isolate the effect of a change in one variable so for example the demand curve the basic law of demand which you have come across an introductory micro as well as the supply curve both assume ketus powerbus in other words all other factors that might cause a change in the position of the curve are assumed to be constant what we're isolating here is the change in the price of coffee causing consumers either to move up the demand up demand curve for coffee with the prices higher contracting their demand or down the demand curve for coffee if the price falls an extension or an expansion of demand so the catalyst power's assumption is is that we're isolating many many factors that could influence the the demand for coffee just to show the impact of a change in the price of the good itself so here are just a couple of examples of assumptions and also some challenges to them standard theory assumes that consumers people behave rationally in making decisions and making choices on how to allocate their limited budget so they might have a complex range of products to think about and the lame is they choose a they make a rational choice to maximize the total satisfaction or the total utility from what they buy of course you may well know that behavioral economists in particular challenge this assumption many consumers show bounded rationality for example there may not be enough information or time or the cost of acquiring that information to make a fully informed rational decision and of course our brains don't necessarily have the computational capacity every single day of the week to process all the information and consider every single possibility so bounded rationality is a challenge to the assumption of fully rational behavior traditional economics again standard theory in the past has assumed that people make their choices independently of one another so my decisions about which film to see which restaurant to go to which product to buy don't influence anybody else's choices independent choice of agents again that assumption is challenged by behavioral economists many of whom believe that decisions are taken in a social context oftentimes people are have close knit social networks people influenced by social preferences by identities and by social norms and crucially many people many consumers imitate or copy the behavior of others almost automatically that's a challenge to the assumption of independent choice let me give you one more example so in traditional theory of the firm we often assume that a monopoly supplier is assumed to maximize profits aim to maximize their their return in other words they find an output where marginal cost equals marginal revenue and they can find a price and output that where that's the case at this output the marginal profit from the next unit is zero well we know that there are many objectives the assumption of profit maximization can be challenged across the board businesses typically have a whole range of objectives at different points of time they might be trying to maximize their revenue or maximize their growth or their market share again once you move away from this you're challenging an assumption and if you do that then the analysis tends to change so uh when you're making an assumption it's a good idea to challenge it because that really does help an essay answer so in your revision when you can highlight on the line make it really clear when an assumption is actually mentioned in your notes what are we assuming about certain things and if you have the confidence be able to challenge an assumption particularly if the real world looks different from the textbook because challenging an assumption or just questioning it in some way can actually be a really effective way to to get good evaluation marks in an essay okay that was a quick video on assumptions in economics