2.8 When to Use the Supply-and-Demand Model

As we’ve seen, the supply-and-demand model can help us understand and predict real-world events in many markets. Through Chapter 10, we discuss perfectly competitive markets, in which the supply-and-demand model is a powerful tool for predicting what will happen to market equilibrium if underlying conditions—tastes, incomes, and prices of inputs—change. A perfectly competitive market (Chapter 8) is one in which all firms and consumers are price takers: No market participant can affect the market price.

Perfectly competitive markets have five characteristics that result in price-taking behavior:

  1. The market has many small buyers and sellers.

  2. All firms produce identical products.

  3. All market participants ...

Get Microeconomics: Theory and Applications with Calculus, 4e now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.