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The mystery of supply and demand

Posted By Russ Roberts On September 24, 2009 @ 4:21 am In Complexity & Emergence,Education,Uncategorized | Comments Disabled

The paradox of markets is this: there is no single price even for apparently homogenous products, yet transactions by others, buying and selling similar goods, affect the price I pay or can charge. An extreme version of this is that every house is unique, yet as a seller of a house, I am not free to charge whatever I want. The price I ultimately receive when I sell my house may have something to do with my bargaining skills and my charm. But I am greatly constrained by what “similar” houses are selling for in “similar” neighborhoods. Supply and demand is the most powerful way to capture that relationship between transactions, even though it presumes, unrealistically, that there is a single price for a particular good.

Here [1] is my essay on this issues.
And here [2] is my attempt to take the insights of Hayek and put them into a supply and demand framework. For me, this helped me understand Hayek and enriched supply and demand.

Teachers and students of Principles or Intermediate Micro should feel free to use both of these pieces.

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[1] Here: http://www.econlib.org/library/Columns/y2007/Robertsprices.html

[2] here: http://www.invisibleheart.com/HowMarketsUseKnowledge.pdf

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