The simple case of pricing with market power assumes that (a) all consumers are charged the same price, (b) the firm sells one product, (c) demand exists in one time period, and (d) competitors do not pursue pricing games. Economists insist on reviewing what happens as each assumption is relaxed one at a time. But it is clear that in the real world all four are relaxed simultaneously. Why does economic analysis insist on such an unrealistic analysis?

Question

What will be an ideal response?

Answer 1

The use of models provides an opportunity to perform careful thought experiments examining cause and effect. Economic analysis that looks at the effects of changing or relaxing one assumption at a time, holding other factors constant, lets us examine how just that one factor affects the determination of price in the real world. The use of models, simplified versions of the real world, provides a better understanding of the role of each of these factors.