1.1.2 Economic Assumptions

1.1.2 Economic Assumptions

 Using the sub-headings below explain each term, giving specific examples of each, to show your understanding

a) The underlying assumptions that:

• consumers aim to maximise their benefit

• businesses aim to maximise their profit.

b) Reasons why consumers may not maximise their benefit:

• Imperfect Information- Would you drink Peckham Springs water? which links to......

• consumers are not always good at calculating their benefits (is it rational not to come to school?)

• consumers have habits that are hard to give up (eg?)

• consumers sometimes copy others’ behaviour. (FOMO)

c) Reasons why producers may not maximise their profit:

• producers may have managers that revenue maximise or sales maximise

• producers may prioritise caring for customers

• producers may complete charitable work and focus on Corporate Social responsibility (CSR).

Which of the above does BSJ fall into?

So why do we assume these things if they are not always true?

Economics and Ceteris Paribus

In order to understand the relationship between two variables in Economics we have to assume that nothing else changes. For example if price increases we expect people to demand less of the good (all other things remaining equal). This is what ceteris paribus means "All other things remaining equal". We assume this because if we didn't we couldn't make any predictions. But in reality what may happen in the real world is that things are not so predictable as economic theory would suggest, as so many things are changing at the same time.