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Equality of Demand and Supply Neither Determines Price Nor Clears the Market

Listed author(s):
  • Mohammad Gani

    (Economic Science Institute, Dhaka, Bangladesh.)

The belief that equality of demand and supply determines price and clears the market is universal. Shockingly, this belief is unfounded. It contradicts macro’s claim that equality of demand and supply determines output. It contradicts (new) monetary theory, which claims that equality of demand and supply is necessary but not sufficient to clear the market. In indirect trade, money also must be used. Micro says that price is equal to marginal cost, rejecting trade theory’s claim that trade is gainful. To remove these and other contradictions, price theory must be repaired. Money’s role in market clearing must also be acknowledged. A new paradigm brings all of economics in a unified model of exchange. It abolishes the micro-macro division, and assimilates price theory with trade and monetary theory. It studies equality of demand and supply at four levels: for each good, transaction, agent, and economy. This equality determines output but not price. Arbitrage determines price. Producers and consumers as price-taker choose quantities, while arbitrageurs choose prices to clear the market. The equilibrium market price exceeds marginal cost to permit gainful trade. Intermediation breaks the link between cost and price and benefit. This new theory goes far beyond neoclassical economics.

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Paper provided by EconWPA in its series Microeconomics with number 0405007.

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Length: 22 pages
Date of creation: 24 May 2004
Handle: RePEc:wpa:wuwpmi:0405007
Note: Type of Document - pdf; pages: 22. The most serious and shocking challenge to price theory will wake you up in horror.
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