As with most academic disciplines, research in economics builds on a combination of theory and empirical evidence. These provide a groundwork for the economists to perform experimental models with a consequential framework in respect to the assumptions looked upon and stated by the faculties. Economic assumptions are assumptions that a company makes about the general market environment which lays the foundation of any conducted study or experiments. Assumptions are made basically to simplify or restructure the given case which can be processed by any person without getting into any complex procedures of rational thinking and adhering to the vast formulas to study a market scenario.
The assumptions reduce the work for professionals to involve into various aspects of the countries and directly hit the right mark for any layman’s acknowledgement. For example, to study the production possibilities of any given company and its effects on the market , the economists might assume the companies produce only two goods but it’s so obvious for anyone to realise that it is so not true. Just to make us equipped with the likelihood of the trade layouts, risks associated with the given prospects of the goods produced, those assumptions are made and once we are satisfied with the study, we can develop our own nexus of the market structure.
Now coming to the question of the role of observation in this combination of assumptions and theory, alike scientists who perform experiments and infer their own observations out of it , economists too observe various circumstances and outcomes and then jump on to conclusions for any study. For instance, economists might live in a country experiencing rapidly increasing prices and be moved by this observation to develop theory of inflation. There is an interrelationship between assumptions and observations where both are considered contemporary. Both have equal amounts of impacts on each other or are interdependent.
The economic models represent economic processes by a set of variables and a set of logical or quantitative relationships between variables. But when we discuss the realism it showcases, it eventually becomes zero since as mentioned earlier the companies or countries or any commodities doesn’t have single or two products that have been taken as assumptions and it contradicts the real world synopsis. Hence, it eventually becomes a source of better understanding in simple terms rather than comparing it to actual reality.