Economic theory explains the way in which an economic system works. The world in which we actually live is very complex place. It is impossible to build up economic theories on the basis of all the factors found in real world. So economists first make certain assumptions about conditions in the Economics. Then they draw conclusions from such assumptions by logical reasoning. The conclusions are stated in the form of economic theories. The following are the fundamental or basic assumptions of economic theory.
Basic Assumptions of Economics:
1. Other things being equal or Ceterious paribus: In every economic theory there is an assumption “Other things being constant”. This is known as Ceterious paribus. There may be several causes for an effect, For example the demand for a commodity may change due to population, income, tastes and fashions, price of the commodity etc. These causes may be acting at the same time, while stating the law of demand we suppose that other causes like population, income etc are constant. When other things remaining constant, the law tells us when price rises, demand falls and when prices falls demand increases. That is why economic theories are said to be hypothetical. The expected results will follow only if the assumptions are true.
2. Man is rational : Economics assumes that eve man is rational, person is a person who always aims at maximizing his total satisfaction by spending his limited money on various goods and services very carefully.
3. Average Man : While making economic theories we assume an average man. For example. while constructing a market demand schedule, we take the demand schedule of a representative individual and multiply by the number of consumers in the market. This representative individual is the average man. Economic theories based on this average man. assume that the average behavior reflects the group behavior.
4. Equilibrium : Equilibrium is another basic assumption of Economics. We suppose that there is equilibrium. Every firm or a consumer will try to reach the equilibrium.The producer gets equilibrium when he gets maximum profits. Similarly consumer gets equilibrium when he gets maximum satisfaction. Economic theories are based on the assumption that every economic unit tends to reach the equilibrium position.
