Demand and Supply: The Stationary Probability Model

Abstract

What are supply and demand? In the present essay the notion of supply and demand in the market, traditional to economics, is exposed to critical rethinking from the point of view of uncertainty and probability concept. The Stationary Probability Price Space Model is developed for the description of behavior of a seller and a buyer in the price space of a one-good market in an economy being in a normal stationary state. Within the framework of the model, the terms supply and demand have changed their meaning; a new definition of the seller's supply and the buyer's demand functions is given. These functions are probabilistic in nature and they are normalized to their total supply and demand expressed in monetary units. In other words, they are seller's and buyer's probability distributions making a purchase/sale transaction in the market for a certain sum of money, respectively. Further, with the help of the proposed additivity and multiplicativity formulas for supply and demand the Stationary Probability Price Space Model is extended to economies having many goods and many agents in the price space. By this strategy the probabilistic supply and demand functions of the whole market are constructed. As a main result of the work, we have laid the groundwork for probability economics. It is defined as a new quantitative method for description, analysis, and investigation of the model as well as real economies and markets. This article is addressed to those interested in the background of economics, first of all, in axiomatic basis of modern economic theory.