The Consequences of Price Discrimination
So far we have considered demand and supply separately. We now come
to a key question: How do the two forces of demand and supply interact
to determine the actual price and quantity? Before considering this
question, you should know that the demand-and-supply model does
apply to all markets. See Applying Economic Concepts 3-1 for a discussion
of why the model in this chapter applies well to apples (and many other
“commodities”) but not to many more interesting products, such as
iPhones (and a whole range of “differentiated” products).
Applying Economic Concepts 3-1
Why Apples but Not iPhones?
The demand-and-supply model that we have developed in this
chapter does not apply to the markets for all goods and
services, and there is a good reason why our example
throughout the chapter has been apples and not, for example,
iPhones, cars, brand-name clothing, or even textbooks. Three
conditions must be satisfied in order for a market to be well
described by the demand-and-supply model.
1. There must be a large number of consumers of the product,
each one small relative to the size of the market.