Why Must All Economic Models Involve Simplifications

question 1

Multiple Choice

Why must all economic models involve simplifications?  

• A) because economic models are generally mathematically based 
• B) because human behaviour is very erratic and unpredictable 
• C) because reality is too complex to understand in its entirety, so it must be reduced to a level that can be understood 
• D) because economic models always try to duplicate all possible information and cover all possible variables that might influence decision making

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Definitions:

Short Run

A period in economics during which at least one input is fixed while others are variable, commonly used to analyze short-term decision-making.

Long Run

A time frame in economics in which all factors of production and costs are variable, allowing all inputs to be adjusted.

Aggregate Demand

The total demand for all goods and services in an economy at various price levels, over a specific time period.

Long-Run Equilibrium

A state in which all parts of the economy, such as supply and demand, are in balance over a significant period, with no external pressures causing shifts in the market.