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Economic theory and assumptions

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1. When do assumptions made in conjunction with economic theorizing have to be realistic? Can unrealistic assumptions provide useful outcomes?

2. In contrast to a socialist economic organization, how would a capitalist system differ?
Consider who owns the capital (means of production) in the two models.

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Solution Summary

The importance of accurate assumptions in economic theorizing; comparison of socialism and capitalism.

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Economic models, like all models, use simplifications to represent reality. It is understood that the model's results will not predict reality perfectly, but a good model should allow us to draw general conclusions that can be useful for policy-makers. For example, if we only need to know the direction of ...

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