MGT Notes

Reference, ‘Principles of Economics,’ by N. Gregory Mankiw, 3e, Pg 21

Just as in science, economists utilize simplifying assumptions to make a complex world easier to understand. As an example, one would assume just two countries selling two goods to each other to test and observe the effects of various theories. The art of making assumptions is to know which ones to make. In physics while studying the effect of air drag on the speed of a car, one would make an assumption that it is negligible when the car is very small vs a full-fledged automobile. Similarly, in economics, one would make different assumptions when studying short run and long run effects.