Question

V) Explain in your own words the Supply and Demand Model and how it relates to the Classical and the Marginalists?

Answer 1

Demand and supply model is used to measure aggregate demand and aggregate supply in the economy. Supply and demand model determines the relationship between quantity for goods that sellers are willing to sell at a given price level and quantity of goods that consumers demand at a given price level. The point of intersection of supply and demand is called equilibrium.

Classical model: classical model believes that economy is a free flow and prices and wages prevailing in the economy get adjusted to the changes in demand. It also assumes that economy self correct itself but adjusting demand and supply model according to the market situation.

Marginalist: according to marginalist, people make decisions that provide utility to them. In other words, if a product provides utility to the consumers then the demand of that product will be higher.