I'm a beginning econ student (returning to school in mid-life as a stay-at-home mom, actually), and when I'm up late at night with the baby, I can't stop thinking about what's fishy about supply and demand. First, thank you Allan for this post - I found it by Googling something along the lines of "supply and demand is a lie," which really speaks to my inner turmoil here. I see this is an old thread, but I'm hoping to revive it a bit. Is this an intentional lapse or an inadvertent one? There are many other problems with the supply and demand model that seem to go unremarked in our teaching. Should we not inform our students, at least at the intermediate level and especially economics majors, that we have to assume that prices adjust as hypothesized? (This is similar to the irritating fact that we can prove that demand curves do not necessarily have negative slopes and so we are forced to assume that they do.) Further, the model is supposed to represent a perfectly competitive market and so price adjustment by firms and households is precluded by assumption. The supply and demand model is a static model it is always in equilibrium, because it is closed with an equilibrium condition. I do not have problems with this intuition but rather with the claim that this a property of the supply and demand model that we teach to undergraduates. This argument can be traced back at least to Smith. The standard undergraduate narrative argues that prices fall in the face of excess supply and rise in the face of excess demand.
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