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Supply and Demand / Market structures

1) What are the advantages and limitations of supply and demand?

2) Analyze how organizations in each market structure (perfect competition, monopoly, monopolistic competition, and oligopoly) maximize profits.

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1) Supply and demand models are often used to describe free markets. They provide us with an efficient, graphical means to explore how the "invisible hand" affects the market. However, the model requires that other things are held constant. In the real world, prices are governed by forces besides supply and demand. In addition, often supply and demand are interconnected and cause ripples and feedback effects throughout the economy. A complete analysis then requires a detailed understanding of the structure of the economy. Therefore, supply and demand analysis is best used for small parts of the economy, where the ripple effect will be minimized. If we attempt to apply what we learn from small scale analyses to the whole economy, we end up with conflicting results. The "paradox of thrift" is an example of how this could happen. Increasing saving by spending less is is generally good for individuals, since most of us have limited resources and need to save some of them for the future. But if everyone saves more, ...