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

Author

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  • Mohammad Gani

    (Economic Science Institute, Dhaka, Bangladesh.)

Abstract

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.

Suggested Citation

  • Mohammad Gani, 2004. "Equality of Demand and Supply Neither Determines Price Nor Clears the Market," Microeconomics 0405007, EconWPA.
  • 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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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0405/0405007.pdf
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    More about this item

    Keywords

    Market Clearing; Price; Allocation; Exchange; Entrepreneurship; Money; Unemployment Arrow; Jevons; Keynes; Kirzner; Marshall; Menger; Mises; Walras.;

    JEL classification:

    • A20 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - General
    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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