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Price Formation: Partial Equilibrium

In: Economics of Markets

Author

Listed:
  • Sabiou M. Inoua

    (Chapman University)

  • Vernon L. Smith

    (Chapman University)

Abstract

This chapter restates more formally and works through all proofs for the theory of classical competitive market price formation as it applies to a single market. Goods and services are demanded (supplied) in discrete units, where to each unit demanded corresponds a consumer’s valuation (producer’s cost), which are reservation values expressed in units of a monetary medium of exchange (for example, dollars). We take seriously the discreteness of the commodity, treating the case of smooth supply and demand merely as a simplified, specific case of the theory, as a model of a large market. Throughout this chapter the distribution of reservation values (potential prices) is treated as data, that are fixed and given for a period and during static sequential replications of a period, as in typical laboratory market experiments. The theory is generalized to multiple markets in Chapter 6 , where, as in classical economics, wealth is explicitly treated as one of the determinants of reservation prices in market realizations.

Suggested Citation

  • Sabiou M. Inoua & Vernon L. Smith, 2022. "Price Formation: Partial Equilibrium," Springer Books, in: Economics of Markets, chapter 0, pages 93-129, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-08428-7_5
    DOI: 10.1007/978-3-031-08428-7_5
    as

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