INTRODUCTION 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 . 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.
In standard Walrasian auctions, the price of a good is defined as the point where the supply and demand curves intersect. Since both curves are generically regular, the response to small perturbations is linearly small. However, a crucial ingredient is absent of the theory, namely transactions themselves. What happens after they occur? To answer the question, we develop a dynamic theory for supply and demand based on agents with heterogeneous beliefs. When the inter-auction time is infinitely long, the Walrasian mechanism is recovered. When transactions are allowed to happen in continuous time, a peculiar property emerges: close to the price, supply and demand vanish quadratically, which we empirically confirm on the Bitcoin. This explains why price impact in financial markets is universally observed to behave as the square root of the excess volume. The consequences are important, as they imply that the very fact of clearing the market makes prices hypersensitive to small fluctuations.