Home > economics > Challenging Concepts of Price, Supply and Demand

Challenging Concepts of Price, Supply and Demand

While these are fundamental concepts in economics, I dare to think they are dangerous simplifications.

Price is an exchange ratio between goods that are exchanged for each other. So if you buy 1 pound of apples for $4, the price is $4 per pound. But what price would be if you buy 1 pound of apples and pay $1 and 1 euro? Or even more confusing, if you buy 1 pound of apples and pay $1 and give 1 pound of sea salt. The concept of price become more difficult to use with more than 2 resources involved in exchange. While one may argue that exchanges involving more than two resources are rare, they are rare theoretically, but not practically because effort to complete an exchange is not taken into account. That is why driving through a toll booth with a transponder looks cheaper than paying cash even though you pay the same amount of money. It is worth to note that the more non-monetary component complimenting the monetary component of the exchange is, the more irrational decisions occur (excessive coupon cutting, driving 40 miles to fill your tank and save very little are just a few examples) if they are based solely or mostly on price (in fact, these examples tell a lot about revealed preferences). Dealing with multiple resources is not the only problem. Multilateral exchange is another one.

The concepts of supply and demand also should be retired as based on price (or implying having two resources and/or two parties), but what is a replacement?

  1. Alexander Glazkov
    January 25, 2010 at 09:01

    A partial answer to my question. What I am looking at is a combinatorial exchange that combines and generalizes two different mechanisms: double auction (multiple buyers and sellers, an identical good) and combinatorial auction (single seller has multiple heterogeneous items up for sale). http://bit.ly/7ytvCo

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