From Cambridge to Eternity: “Market as a Framework of Reference”

 

Suppose the product “widget” to be traded in the market of Mini-polis with a certain number of households.

             For the sake of idealization we assume: ①The widget endures half a year or so in average by ordinary uses of the household; ②The utility per unit of widget declines at the household; ③The production cost per unit of widget increases over the month or so wherein the firm keeps the physical capital “fixed”; ④The invisible hand does not let wishful or dreaming traders in the market; the demander as potential purchaser shall be equipped with a wherewithal, or “money” as called in macroeconomics; the potential supplier with “widgets” to be provided in the month on demand; ⑤Certified public accountants take notes of individual exchanges in the market; ⑥By various decrees of the commonwealth, the unit of account is the thaler, while the book closing for the purpose of financial accounting is monthly.

             The individual households in the community of Mini-polis come to the market roughly once every six months. They when in the market measure the marginal utility in the thaler. The nearby firms owned by one to many households in the commonwealth come to the market on a monthly basis while measuring the marginal production cost in the thaler.  

             Enter the month of April. Some out of all the households in town come to the market on the week day of their choice of convenience. On the flipside, the firms keep a close eye on the market in search of potential buyers for an opportunity to supply widgets.

             One fact we know for sure is: Each as demander will compare its “curve” of diminishing marginal utility scaled in the thaler with prices offered by the potential suppliers whom the demander happens to come across; vice versa as for every supplier. Another we know is: Individual exchanges take place more often by chance than by presupposition, under the boundary condition that no demander buys at a price above the marginal utility while no supplier sells at revenue below the marginal production cost. On the sidewalk, we find that some demanders and other suppliers voluntarily choose to walk away.

             The communal CPA in chief closes the books as at April 30^th. All widgets from the successful suppliers are sold to the successful demanders. Prices are usually different; to say the minimum, there is no guarantee whatsoever that there be an “equilibrium price.” Nevertheless, the CPA does calculate the monthly average price of a certain kind on behalf of the invisible hand. The most popular way of averaging might well be prices algebraically weighted by the quantity.

             That’s the real story, except for being hard for the invisible hand, not to mention ordinary students of economics, to comprehend. If we come back home as is, we might not take a sound sleep.

             Let’s go for a metaphor and make still more idealizations for the sake of communicational convenience: ⑦We are to imagine a single price which would have cleared the market in the month of April; ⑧We line up all the marginal demand curves from the highest to the lowest for the given purpose of buying the widget ⑨We line up all the marginal production costs from the lowest to the highest of the defined objective of selling the widget.

             We leave the following stories to Principles of Economics. Notwithstanding, we can easily imagine that “the equilibrium price” is applicable only to April and that ex post. The price as defined in the textbook might be called the “market average” of all prices prevailed in April.

             After a full circle, the market has been “cleared,” or in equilibrium, except for one regret: The equilibrium price will surely be different in May as long as the market is organic.