Entropy and free-energy based interpretation of the laws of supply and demand

Abstract

This article examines the laws of supply and demand applied to human business relations, to the behaviour of social animals and to all living things that interact in scarce resource environments. The issue of the reasons, boundaries, and possibilities of applying the laws of supply and demand to the behaviour of all living things has not been examined well enough yet. We study the universal validity of the principles of supply and demand and explain the core fundamental principles using the laws of thermodynamics. According to Prigogine’s theorem, when in a stationary state, every living thing strives to retain or increase its free energy and, respectively, retain or decrease its own entropy. Through exchanges, e.g., purchases, sales, trades, the price of goods, services and objects is identified in terms of the free energy used to acquire one exchange unit. From this point of view, the laws of supply and demand can be applied in forecasting social behaviours in different physical, biological, or service markets. We employ mathematical modelling techniques and interdisciplinary approaches combining economics and thermodynamics sets of tools. The main contributions of this study are providing deeper insights and explanation of action mechanisms of the laws of supply and demand, and determining their scope and range of applicability. This study is contrasted to other recent investigations in the field of econophysics and identifies similarities and differences between alternative strategies.