Economics, 3rd Edition

The Role of Assumptions

If you ask a physicist how long it would take for a cannonball to fall from the top of the Leaning Tower of 

Pisa, she will probably answer the question by assuming that the cannonball falls in a vacuum. Of course, 

this assumption is false. In fact, the building is surrounded by air, which exerts friction on the falling can-

nonball and slows it down. Yet the physicist will correctly point out that friction on the cannonball is so 

small in relation to its weight that its effect is negligible. Assuming the cannonball falls in a vacuum greatly 

simplifies the problem without substantially affecting the answer.

Economists make assumptions for the same reason: assumptions can simplify the complex world and 

make it easier to understand. To study the effects of international trade, for example, we may assume 

that the world consists of only two countries and that each country produces only two goods. Of course, 

the real world consists of dozens of countries, each of which produces thousands of different types of 

goods. But by assuming two countries and two goods, we can focus our thinking. Once we understand 

international trade in an imaginary world with two countries and two goods, we are in a better position to 

understand international trade in the more complex world in which we live.

The art in scientific thinking is deciding which assumptions to make. Suppose, for instance, that we were 

dropping a beach ball rather than a cannonball from the top of the building. Our physicist would realize that the 

assumption of no friction is far less accurate in this case: friction exerts a greater force on a beach ball than on 

a cannonball because a beach ball is much larger and, moreover, the effects of air friction may not be negligible 

relative to the weight of the ball because it is so light. The assumption that gravity works in a vacuum may, 

therefore, be reasonable for studying a falling cannonball but not for studying a falling beach ball.

Similarly, economists use different assumptions to answer different questions. What happens to demand 

if price changes but we assume incomes stay constant? If we make an assumption of perfect competition 

in an industry, what will happen to long-run profits? What will happen to the economy when the govern-

ment changes the amount of money in circulation if we assume prices do not change much in the short 

run? How does this differ in the long run if we assume that prices are flexible? As we have seen above, 

these assumptions have to be used with care and they are also subject to testing to see the extent to which 

the assumption is reasonable in the same way that it is deemed reasonable by the physicist to drop the 

assumption of friction when considering the effect of dropping a cannonball from the Leaning Tower of Pisa.