When to actually use Supply and Demand, and when Not To

Supply and Demand is a useful model when both provisioning and utilization of a resource vary dynamically across the economy, especially for real resources with many different producers and consumers.

However, supply and demand is NOT useful for understanding the macroeconomic balance of power that emerges hierarchically within economies. This includes both economies with strong and weak property. Weak property is what I am using to refer to a situation where resource authority is not clear or well defined, but is constantly being determined through processes of social negotiation and observed loyalty.

In particular ALL financial assets are a natural monopoly, so while bid/ask depth charts may appear to resemble supply and demand curves, there is not a distinction between buyers and sellers as to what constraints they face that affect their pricing. In other words, for financial assets, both buyers and sellers use the same criteria for setting prices, the preference for lower prices by buyers, and higher prices by sellers, is not sufficient for supply and demand curves to be useful. Also, financial assets behave differently from real resources.

Meanwhile, for housing markets, buyers and sellers generally correspond to the process of production and consumption. Buyers either want to use the housing themselves, or they are evaluating the potential for someone who does. Sellers of housing are looking at the costs associated.

Housing is naturally "non-monopolistic and non-monopsonistic", in other words, there are naturally many different buyers and sellers, and their costs and consumption preferences change over time.

It tends to be more difficult for sellers or buyers to behave like a cartel, although this can definitely happen, especially through policy which restricts what kind of housing can be bought or sold.

Note that a monopoly alone is not sufficient to make supply and demand a poor model. The issue is how costs and incentives change over the quantity consumed. So if you have fixed over head costs and constant marginal costs, then sellers will seek greater volume with a decreasing margin, especially with a monopoly. In such a case, only the demand curve is applicable, and sellers may in fact try to establish differentiated pricing, whether with coupons and promotions and sales, or small differences in the product, to hit every spot along a demand curve.

Sometimes, a market appears to have many sellers, but these are mostly "resellers", who offer differentiated experiences to different consumer sets. In this case, again, the supply curve reshapes to hit every spot along the consumer's demand curve.

Supply and Demand Markets

• housing
• oil(constantly consumed commodity)
• food(pre-modern/agrarian, constrained production)

Demand Markets

• consumer products and services
• modern food markets(greater capacity and low costs)

Supply markets

• Gold(commodities with low consumption rates and low storage costs)

Neither

• Financial Assets(exchange value, resource hierarchy)