A theory is a set of simplified interrelated facts explaining the complex real world. A theory is an abstraction from the real world and it is therefore a deliberately simplified analytical framework. Due to the complexity of the real world economy, we cannot understand all the interrelationships at once and after all, these interrelationships are not of equal importance in the phenomena of interest. Therefore, the chosen and simplified framework is referred to as a theory e.g. demand theory


Qdx = f(Px)

There are many other variables that explain demand but have to be excluded for simplicity and financial implications e.g. religion, population, weather, transport system, etc.

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