From Walras’ auctioneer to continuous time double auctions: A general dynamic theory of supply and demand


One of the most time-worn statement of economic science is that “prices are such that supply matches demand”. In order to explain how this really comes about, one usually invokes a Walras auctioneer, who attempts to measure the supply and demand curves \(S(p)\) and \(D(p)\), that give the total amount of supply/demand for a given good (or asset), would the price be set to \(p\). The equilibrium price \(p^*\) is then such that \(D(p^*) = S(p^*)\), which maximizes the amount of good exchanged among agents, given the set of preferences corresponding to the current supply and demand curves (citation not found: walras2013elements). In reality, the full knowledge of \(S(p)\) and \(D(p)\) is problematic, and Walras envisioned his famous tâtonnement process as a mean to observe the supply/demand curves. However, there is a whole aspect of the dynamics of markets that is totally absent in Walras’ framework. While it describes how a pre-existing supply and demand would result in a clearing price, it does not tell us anything about what happens after the transaction has taken place. In this sense, the Walrasian price is of very limited scope, since the theory ceases to apply as soon as the price is discovered.

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