Assumptions in the classic model
- Review the takeaways from the classic supply and demand module
4. Summary of the Classic Model
The classic supply and demand model is a powerful teaching and analytical tool both because of its simplicity and because of the wide variety of situations to which it can be applied.
It provides a succinct framework to understand patterns that we see in our everday experience, such as the fact that supply shortages—when combined with unchanging demand—tend to make things more expensive. The supply and demand model provides a mathematical and a visual way to explain and understand why prices and quantities are expected to be different under situations like these.
However, this explanatory power also comes with a tradeoff, which is a set of model assumptions that may not hold across a wide variety of markets in real life. When these assumptions do not hold, the model provides little guidance as to the expected outcome.
In the next module, we introduce a dynamic version of the supply and demand model that relaxes some, though not all, of these assumptions. Although we do not claim this model is necessarily a better description of reality, we do think it provides a better framework to investigate how model assumptions can impact model outcomes. Ultimately, this flexibility allows learners to have a richer understanding of supply and demand as well as a greater appreciation for the complexity and potential pitfalls of models in general.