Limitations of Economic Theories Essay examples

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Economics is the study of how individuals, governments, and nations make use of scarce resources to best satisfy their unlimited wants. Microeconomics is the field of economics that looks at the decisions of firms and individuals as they try to make themselves as well off as possible, and how these decisions can influence the market and even the entire economy within which they operate. Although these theories are very useful in explaining why consumers make the decisions they make, there are still some limitations of these theories that need to be taken into consideration. This essay will outline some of these limitations including: static theories, imperfect knowledge, number of goods in a utility function, behavioural changes around …show more content…
However, upon lowering the price of apple pies the Pie Firm does not see the corresponding increase in demand for apple pies, this is because the price of brownies, a substitute for apple pies, was significantly decreased at the same time, so the individuals who the Pie firm expected to now sell apple pies to were now buying brownies instead. This shows how looking exclusively at demand and supply curves, can lead to predictions that differ from actual results because of the factors that are held constant.

Economic theory is limited in that it assumes individuals and firms have perfect knowledge of what is happening in the market. This is a significant limitation because it highly unlikely that individuals or firms are going to know all the prices for each good or that they will know how these prices change over time. An explanation for why individuals do not have perfect knowledge is bounded rationality, which means, "People have a limited capacity to anticipate, solve complex problems, or enumerate all options." (Perloff, 2014, p. 117) An example of this imperfect knowledge is when going to the supermarket, the individual does not know the price of every brand of good they purchase, nor do they have the time to search every supermarket to find all the possible prices of each brand. Instead, they make the decision there and only look at the prices that are available

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