An assumption is a condition the model needs to hold for its prediction to be true. Stating it, and saying what happens if it fails, turns a description into an evaluation.
This final lesson in supply and equilibrium follows on from simultaneous shifts, because you will recognise assumptions as the things that were held constant.
How do you find the assumption, step by step?
- Write the prediction in one sentence. For example, “If the price rises, quantity supplied will rise.”
- Ask what else could change during that time: costs, technology, the number of sellers, buyers’ tastes or incomes, the weather.
- Choose the factor that matters most for this prediction.
- Write the assumption using a stem such as “This assumes that… stays the same”.
- Add the consequence of it failing. “If it did change, the curve would shift and the outcome would differ.”
Worked example
Bukit Sari is a fictional town, and its noodle market uses the schedule below.
| Price (RM per bowl) | Quantity demanded | Quantity supplied |
|---|---|---|
| 3 | 700 | 450 |
| 4 | 600 | 600 |
| 5 | 500 | 750 |
Prediction: “At RM5 there is a surplus of 250 bowls, so the price will fall back towards RM4.”
Check the figures: supply 750 minus demand 500 is 250, so the surplus is correct.
Assumption 1: the price can move freely. The prediction needs stallholders to be free to lower prices. If a rule fixed the price at RM5, the surplus could continue.
Assumption 2: other factors are unchanged. The schedule is drawn for given costs and tastes. If a rise in the price of flour shifted supply left at the same time, the surplus could be smaller or disappear.
A written evaluation could read: “The market should return to RM4 and 600 bowls, assuming stallholders can lower prices and that no other factor, such as the cost of flour, changes in the meantime. If costs rose, supply would shift left and the new equilibrium price would be higher than RM4.”
Notice that the answer gives the prediction, the assumption, and the effect of it failing.
What mistake do students make?
Mistaken answer: “This model is not realistic because the real world is more complicated.”
The statement is true but it cannot earn credit, because it is not tied to the question. It names no factor and no consequence.
The correction is to name one specific factor, say that the model holds it constant, and describe how the result would change if it moved. Specific beats general.
Check yourself
1. A seller says: “When the price of my lunch boxes rises from RM20 to RM25, the quantity supplied rises from 60 to 80.” State one assumption for this to be true.
Show answer
This assumes costs of production and the number of sellers stay the same. If the price of plastic rose at the same time, supply would shift left and fewer than 80 boxes might be offered at RM25.
2. A prediction says the price of a good rises when demand rises. Name an assumption about supply.
Show answer
It assumes supply does not increase by an equal or larger amount at the same time. If it did, the price might not rise. This is the ceteris paribus assumption applied to supply.
3. Why is “all other things are equal” not enough on its own as an evaluation point?
Show answer
It names no factor and shows no consequence. A stronger version names one factor, such as costs, and explains how the result would change if that factor moved.
Where this leads next
With the five lessons complete, check your understanding in the supply and equilibrium practice set. Later topics such as elasticity will ask you to apply the same habit with more precise measures.
If you want a teacher to test your assumptions against unfamiliar questions, online one-to-one Economics tuition is built for that kind of conversation.