Price Formation: Partial Equilibrium

Sabiou M. Inoua () and Vernon Smith ()
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Sabiou M. Inoua: Chapman University

Chapter Chapter 5 in Economics of Markets, 2022, pp 93-129 from Springer

Abstract: 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.

Keywords: Price formation; Partial equilibrium; Invariance principle; Marginality tradition; Neoclassical price theory; Competitive equilibrium (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-08428-7_5

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DOI: 10.1007/978-3-031-08428-7_5

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