Modifying assumptions in the dynamic model
- Review the takeaways from the dynamic supply and demand module
3. Concluding Thoughts on the Dynamic Model
In this module, we presented a dynamic version of the classic supply and demand model. This model modifies the classic model in several key ways:
- Each seller sets their own price, so unlike in the classic model, there can be multiple prices in the market and there is no concept of the market (as a whole) playing a coordination role;
- Time is explicitly included in the model, in the sense that buyers and sellers make decisions in each round, and these rounds are simulated repeatedly;
- The information that buyers and sellers have access to is made more explicit; and
- The model retains the individuality of buyers and sellers rather than representing them as abstract demand and supply curves.
We saw that depending on the assumptions we apply within this dynamic framework, its simulations result in outcomes that closely mirror the equilibrium outcomes that are predicted by the classic model. By introducing a time component, the dynamic model suggests how markets might transition from one kind of outcome to another, whereas the classic model views different outcomes as independent and static snapshots of equilibrium.
In addition, the dynamic model allows us to test some assumptions because of how they are "internalized" within the model, rather than being fully outside of the model as they are in the classic version. In the last section, we saw that, in terms of the information that buyers and sellers can access, modifying these assumptions can quickly cause outcomes to deviate from what would be predicted by classic equilibrium.
The key takeaway is that modeling assumptions are critical to the predictions that economic models make, and this is certainly true of the supply and demand model. Additional modules will be added to imagine economics to continue to explore such dynamics in different contexts.