This paper introduces and formalizes the classical view on supply and demand, which, we argue, has an integrity independent and distinct from the neoclassical theory. Demand and supply, before the marginal rev-olution, are defined not by an unobservable criterion such as a utility func-tion, but by an observable monetary variable, the reservation price: the buyer’s (maximum) willingness to pay (WTP) value (a potential price) and the seller’s (minimum) willingness to accept (WTA) value (a potential price) at the marketplace. Market demand and supply are the cumulative distri-bution of the buyers’ and sellers’ reservation prices, respectively. This WTP-WTA classical view of supply and demand formed the means whereby mar-ket participants were motivated in experimental economics although ex-perimentalists (trained in neoclassical economics) were not cognizant of their link to the past. On this foundation was erected a vast literature on the rules of trading for a host of institutions, modern and ancient. This pa-per documents textually this reappraisal of classical economics and then formalizes it mathematically. A follow-up paper will articulate a theory of market price formation rooted in this classical view on supply and demand and in experimental findings on market behavior.
Inoua, S. M., & Smith, V. L. (2020). The classical theory of supply and demand. ESI Working Paper 20-11. https://digitalcommons.chapman.edu/esi_working_papers/305/
ESI Working Paper 20-11