Managerial Economics and Strategy, 2/e

2.6 When to Use the Supply-and-Demand Model

As we have seen, the supply-and-demand model can help us to understand and predict real-world events in many markets. As with many models, the supply-and-demand model need not be perfect to be useful. It is much like a map. A map can leave out many details and still be very valuable—indeed, maps are useful in large part because they simplify reality. Similarly, the supply-and-demand model gains much of its power from its simplicity. The main practical question concerns whether the model is close enough to reality to yield useful predictions and conclusions. We have learned that the supply-and-demand model provides a very good description of actual events in highly competitive markets. It is precisely ...