Demand and supply curves

These continuous curves are a diagrammatic representation of equilibrium in neoclassical economics, with the advanced mathematical form (with assumptions of continuity, constant returns to scale and representative agents) being Dynamic Stochastic General Equilibrium (DSGE) models dominating macroeconomic literature. These are misleading or wrong for many reasons.

1) Demand and supply cannot be continuous for indivisible goods and services, i.e. lumpy items such as vehicles. Only money makes real goods appear continuous and divisible.

2) The institutions involved, the location and time are of the essence in understanding economic behaviour and outcomes. None are present in the diagram.

3) Markets clear in many ways (prices, availability, stockbuilding, wastage, reallocation, rationing). Clearing through prices is unduly restrictive. Equilibrium through pricing is imaginary.

4) Supply and demand is not independent and they are uncertain.

5) In identifiable markets, there are normally many goods and service and many prices, with limited information about quality.

View all resources