I've heard this game was built from the ground up to work with a joystick in mind. But will it work perfectly fine with a Mouse and Keyboard?

Personally I don't like playing with a K&M, but yes, it will work just fine and many people play with just a K&M and like it.

I only use a K&M, works great, just get used to the keyboard shortcuts on the reference card.

I like to use the numpad for fast turns and the mouse for finer control.

Snoo probably has the best advice, I play with a keyboard and mouse, and the advice I have to offer is when you find yourself going head to head against another ship, (first off, god help you if it's a dragon) get ready to whip the mouse around a lot. I may try that numpad idea though.

Would you fly an airplane in real life with a mouse? I wouldn't. I prefer using a stick for FS.

Most airplanes don't have as many weapons to choose from.

You'll need the KB for stuff like communicating with the supply ship and you wingmen anyway, unless you have a button for that?