Assumptions in Economics
Economic models rely on assumptions to simplify reality and make analysis tractable. Common assumptions include perfect information, rationality, perfect competition, and homogeneous products. These assumptions allow economists to build theories with predictive power, though they often diverge from real-world conditions.
Real World
The 2008 financial crisis exposed the flawed assumption of rational behaviour — banks and consumers had taken on excessive risk, contradicting models built on the assumption that agents always maximise utility rationally.
Exam Focus
Use assumptions as evaluation — challenge a model's conclusions by questioning whether its assumptions hold in practice.
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