Abstraction

Is this realistic? No. Do these other factors affect demand? Most certainly. However, without an abstract assumption holding these other influences unchanged, the law of demand relation is lost in the confusion.

Two Reasons

• Simplification: One important use of assumptions is to simplify an analysis. The world is complex. The economy is complex. A multitude of forces are perpetually at work. Making sense of the apparent chaos is the goal of science. This goal is pursued by focusing on one topic, one problem, and one segment of the world at a time. In so doing, it is essential to assume that other aspects of the world are unchanged or irrelevant. Simplifying assumptions often establish ideal benchmarks that can be used to evaluate real world conditions.

  For example, a study of short-run production that is designed to identify the law of diminishing marginal returns, is likely to ignore (that is, assume as irrelevant) the government sector and government regulation of business. Is this totally realistic? No. But it does simplify the analysis. It enables the analysis of those aspects of the complex world that are MOST relevant to the law of diminishing marginal returns.



• Control: Assumptions are also commonly used as control variables. The use of seemingly unrealistic assumptions makes it possible to control an analysis and to identify individual cause-and-effect relations. That is, at first a factor might be assumed constant (implementing that ceteris paribus assumption) merely to see what happens when the factor changes.

  For example, the standard market analysis employs the ceteris paribus assumption to hold demand and supply determinants constant when deriving the market equilibrium. They are not REALLY constant. But, by holding them constant initially, each can be changed separately (that is, the ceteris paribus assumption is relaxed) to analyze how each affects equilibrium.

Misuse and Politics