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Revisiting Theoretical Exposition of Supply and Demand through ABM
This research helps enhance the traditional economic understanding of market dynamics by exploring the price adjustment mechanisms with the supply and demand model. The traditional supply and demand model often employs the Walrasian tatonnement process, which simplifies the movement towards market equilibrium as a centralized trial-and-error method in determining the equilibrium price, with no transactions at disequilibrium. This centralized approach presents a theoretical inconsistency with the neoclassical emphasis on decentralized markets as the foundation for achieving equilibrium. This paper aims to bridge this gap by integrating the Walrasian model with a decentralized perspective using a simple agent-based model (ABM) focused on the housing market. It demonstrates how decentralized trading, underpinned by profit maximization and arbitrage, naturally facilitates price convergence, offering a more empirically grounded and realistic representation of market processes. By doing so, this study not only complements the existing theoretical framework but significantly extends it by reconciling the theoretical depiction of market equilibrium with the operational realities of a competitive, decentralized marketplace. Using the ABM approach to explain S&D model dynamics can significantly enhance the student’s comprehension of economic education.