How Realistic is the Supply/Demand Equilibrium Story? A Simple Demonstration of False Trading and its Implications for Market Equilibrium

35 Pages Posted: 4 Apr 2006 Last revised: 10 Nov 2010

See all articles by Neil H. Buchanan

Neil H. Buchanan

University of Florida - Levin College of Law

Date Written: November 9, 2010

Abstract

Transactions at non-equilibrium prices are false trades. Under standard assumptions, markets without false trading produce Pareto-efficient outputs. This paper demonstrates graphically the complications created when false trades occur, showing that quantities produced deviate from Pareto-efficient quantities except under unique conditions. In a general equilibrium framework, this spills over to cause Pareto-inefficient results in other markets as well. These observations call into question the use of standard supply-and-demand equilibrium theory as a starting point for policy analysis.

Keywords: T√Ętonnement, False Trading, Pareto Efficiency, Convergence, Disequilibrium

JEL Classification: B41, D50

Suggested Citation

Buchanan, Neil H., How Realistic is the Supply/Demand Equilibrium Story? A Simple Demonstration of False Trading and its Implications for Market Equilibrium (November 9, 2010). The Journal of Socio-Economics, Vol. 37, No. 1, pages 400-415, 2008. Available at SSRN: https://ssrn.com/abstract=894185

Neil H. Buchanan (Contact Author)

University of Florida - Levin College of Law ( email )

PO Box 357069
Gainesville, FL 32635
United States

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