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The Classical Theory of Supply and Demand

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  • Sabiou M. Inoua

    (Economic Science Institute, Chapman University)

  • Vernon L. Smith

    (Economic Science Institute, Chapman University)

Abstract

This paper introduces and formalizes the classical view on supply and demand, which, we argue, has an integrity independent and distinct from the neoclassical theory. Demand and supply, before the marginal revolution, are defined not by an unobservable criterion such as a utility function, but by an observable monetary variable, the reservation price: the buyer’s (maximum) willingness to pay (WTP) value (a potential price) and the seller’s (minimum) willingness to accept (WTA) value (a potential price) at the marketplace. Market demand and supply are the cumulative distribution of the buyers’ and sellers’ reservation prices, respectively. This WTP WTA classical view of supply and demand formed the means whereby market participants were motivated in experimental economics although experimentalists (trained in neoclassical economics) were not cognizant of their link to the past. On this foundation was erected a vast literature on the rules of trading for a host of institutions, modern and ancient. This paper documents textually this reappraisal of classical economics and then formalizes it mathematically. A follow-up paper will articulate a theory of market price formation rooted in this classical view on supply and demand and in experimental findings on market behavior.

Suggested Citation

  • Sabiou M. Inoua & Vernon L. Smith, 2020. "The Classical Theory of Supply and Demand," Working Papers 20-11, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:20-11
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    References listed on IDEAS

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    1. repec:ucp:bkecon:9780226199993 is not listed on IDEAS
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    Cited by:

    1. Darma, Surya & Hakim, Yundi Permadi & Kurniawan A., Erwin & Darma, Dio Caisar & Suparjo, Suparjo, 2022. "Understanding Market Behavior on Corn Commodity: Phenomenon at Year End," Asian Journal of Agriculture and Rural Development, Asian Economic and Social Society (AESS), vol. 12(02), January.
    2. Inoua, Sabiou M. & Smith, Vernon L., 2023. "A classical model of speculative asset price dynamics," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).

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    More about this item

    Keywords

    History of Economic Thought; Methodology of Economics; Microeconomic Theory; Experimental Economics;
    All these keywords.

    JEL classification:

    • B - Schools of Economic Thought and Methodology
    • C - Mathematical and Quantitative Methods
    • D - Microeconomics

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