An Abstract Model

Market Model

Suppose this particular diagram is constructed to represent the Shady Valley market hot fudge sundae market. By design, by assumption, the demand curve (D) represents the market demand for hot fudge sundaes by the residents of Shady Valley. The supply curve (S) is then assumed to represent the supply of hot fudge sundaes in the Shady Valley area.

With this configuration in place, this diagram can be used to ascertain the market equilibrium. It can be subjected to comparative statics to see how the equilibrium price and equilibrium quantity are affected by changes in any of the demand or supply determinants. This analysis then can be used to suggest what might happen to the actual price, production, and consumption of hot fudge sundaes in Shady Valley.

However, this diagram is only a model. The real market for hot fudge sundaes does not include any lines or curves. It includes regular people who saunter down to their local ice cream establishment for a freshly prepared hot fudge sundae. It includes the wide range of real world establishments--restaurants, fast-food franchises, street vendors--that make hot fudge sundaes. It includes people buying and consuming. It includes firms producing and selling.

Real World Complexities

When economists create abstract models of the real world, these alternatives need to be considered. Decisions must be made before constructing a model. Perhaps the relevant market is not hot fudge sundaes, but ice cream treats or frozen desserts. How a model is constructed and which real world details are included or ignored is usually determined by what questions economists need answered. If economists are ultimately interested in ice cream sales, then ice cream treats, regardless of topping, is the appropriate model. However, if economists are more concerned with the chocolate industry, then all types of frozen desserts with hot fudge topping are relevant.

Part Science, Part Art