The Classical Theory of Supply and Demand

Sabiou Inoua and Vernon Smith ()

Working Papers from Chapman University, Economic Science Institute

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.

Keywords: History of Economic Thought; Methodology of Economics; Microeconomic Theory; Experimental Economics (search for similar items in EconPapers)
JEL-codes: B C D (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-exp, nep-hme, nep-hpe and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Working Paper: The Classical Theory of Supply and Demand (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:20-11

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