Google
Wednesday 
May 22, 2024 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
FEDERAL TRADE COMMISSION ACT: This antitrust law passed in 1914 created the Federal Trade Commission to clarify which practices and activities were illegal under antitrust laws. The Federal Trade Commission Act was one of three major antitrust laws passed in the late 1800s and early 1900s. The other two were the Sherman Act and the Clayton Act. In particular, the Federal Trade Commission was responsible for setting the standards for what constituted unfair competition and for investigating business activities that might lead to monopolization of a market or restraint of trade. The Whealer-Lea Act, passed in 1938, was a major amendment t the Federal Trade Commission Act.

Visit the GLOSS*arama


ASSUMPTION:

An initial condition or statement of a model or theory that sets the stage for an analysis by abstracting from the real world. Assumptions are important to economic analysis. Some assumptions are used to simplify a complex analysis into more easily manageable parts. Other assumptions are used as control conditions that are subsequently changed to evaluate the consequences.
Assumptions form the foundation upon which theories, models, and analyses are constructed. They simplify and highlight the problem or topic under study. Even though assumptions often appear to be "unrealistic," when properly used they make it possible to analyze an exceedingly complex set of events.

Abstraction

Assumptions are inherently abstract and seemingly unrealistic. However, they make it possible to identify a specific cause-and-effect relation by assuming other influences are not involved. For example, the law of demand is the relation between demand price and quantity demanded. Demand, however, is also affected by factors other than demand price, such as buyers' income, the prices of other goods, or buyers' preferences. When working with the law of demand, it is essential to assume that these other factors do not influence demand when identifying the law of demand.

Is this realistic? No. Do these other factors affect demand? Most certainly. However, without an abstract assumption holding these other influences unchanged, the law of demand relation is lost in the confusion.

Two Reasons

Assumptions are used for two primary reasons--to simplify a complex analysis and to control an analysis.
  • Simplification: One important use of assumptions is to simplify an analysis. The world is complex. The economy is complex. A multitude of forces are perpetually at work. Making sense of the apparent chaos is the goal of science. This goal is pursued by focusing on one topic, one problem, and one segment of the world at a time. In so doing, it is essential to assume that other aspects of the world are unchanged or irrelevant. Simplifying assumptions often establish ideal benchmarks that can be used to evaluate real world conditions.

    For example, a study of short-run production that is designed to identify the law of diminishing marginal returns, is likely to ignore (that is, assume as irrelevant) the government sector and government regulation of business. Is this totally realistic? No. But it does simplify the analysis. It enables the analysis of those aspects of the complex world that are MOST relevant to the law of diminishing marginal returns.


  • Control: Assumptions are also commonly used as control variables. The use of seemingly unrealistic assumptions makes it possible to control an analysis and to identify individual cause-and-effect relations. That is, at first a factor might be assumed constant (implementing that ceteris paribus assumption) merely to see what happens when the factor changes.

    For example, the standard market analysis employs the ceteris paribus assumption to hold demand and supply determinants constant when deriving the market equilibrium. They are not REALLY constant. But, by holding them constant initially, each can be changed separately (that is, the ceteris paribus assumption is relaxed) to analyze how each affects equilibrium.

Misuse and Politics

Unfortunately, economic analysis occasionally makes excessive use of unrealistic assumptions, assumptions that not only define the problem but ensure particular conclusions. For example, the study of pollution externalities might begin with the assumption of a competitive market, free of market failures. In so doing, the problem of pollution is effectively assumed away, which is not only unrealistic, but defeats the purpose of the analysis. However, if the analysis is intended to "prove" pollution is not a problem, then the goal has been achieved.

Much like chemists occasionally blow up their laboratories, economists do misuse assumptions. Whether they realize it or not, economists are inclined to use economic theories that conform to preconceived political philosophies and world views. Liberals work with liberal economic theories and conservatives work with conservative economic theories. This, by itself, is no crime. The ongoing debate and competition of ideas brings out the best of both and enables a better overall understanding of the economy. However, the temptation to use unrealistic and unjustified assumptions that produce conclusions and support policies consistent with preconceived beliefs is always present. Doing so is not necessarily good.

<= ARC ELASTICITYASSUMPTIONS, CLASSICAL ECONOMICS =>


Recommended Citation:

ASSUMPTION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 22, 2024].


Check Out These Related Terms...

     | model | theory | hypothesis | principle | world view | model | fallacies | fallacy of false cause | cause and effect | ceteris paribus | variables |


Or For A Little Background...

     | scientific method | economic analysis | axiom | abstraction | positive economics |


And For Further Study...

     | economic thinking | economics | dismal science | graphical analysis | marginal analysis | normative economics | seven economic rules | political views | science | social science | seventh rule of complexity | assumptions, production possibilities | political views |


Search Again?

Back to the WEB*pedia


APLS

PURPLE SMARPHIN
[What's This?]

Today, you are likely to spend a great deal of time at the confiscated property police auction wanting to buy either several orange mixing bowls or clothing for your pet dog. Be on the lookout for mail order catalogs with hidden messages.
Your Complete Scope

This isn't me! What am I?

The first "Black Friday" on record, a friday marked by a major financial catastrophe, occurred on September 24, 1869 -- A FRIDAY -- when an attempted cornering of the gold market induced a financial crises and economy-wide depression.
"There is no passion to be found playing small in settling for a life that idles than the one you are capable of living."

-- Nelson Mandela

AOQL
Average Outgoing Quality Limit
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2024 AmosWEB*LLC
Send comments or questions to: WebMaster