By Jonathan B. Wight

When I was a graduate student working on my PhD the department chair asked me to give a few guest lectures for him while he was out of town. This was to a lecture hall with about 200 students in Econ 101.

The topic was supply and demand and equilibrium.  I went through the basics of how markets reach equilibrium through the impartial forces of the upward and downward “scissor blades”.  All very standard stuff.

At the end of the class a student asked, “Do markets ever actually reach equilibrium?”

“No,” I replied. “That is a useful fiction. In real life the factors that are being held constant to draw supply and demand curves are constantly changing—income, wealth, expectations, the prices of complements and substitutes in consumption and production, the prices of inputs used in production, and so on."

“Market exchange takes us closer to equilibrium but we never reach that end.”

"In short," I concluded, "if you examine a stock price or the price of oil or gold or pork bellies or any other commodity that approximates a competitive market, the price jumps around every second and never stays put at some imagined equilibrium.”

The next class period the chairman got up and a student asked him, “I was confused at the end of class about market prices.  Do markets arrive at the equilibrium price?”

“Yes!” he replied.  Simple answer, no elaboration.

I was sitting in the front row and slunk my head down in humiliation.  I guess if you are teaching to 200 students in a large lecture hall it is best to keep it simple.  But I still like my answer better.

I also think that when we dumb things down to make them easier, the market loses some of its intrinsic attraction and charm. Rather than an exciting place where knowledgeable traders are betting vast fortunes against each other to anticipate where the equilibrium is heading, the market process comes across as being dull and predictable.

The irony is that when we observe prices that are unchanged day to day, that is usually a sign that supply and demand are not determining the outcome in a competitive market—but rather an oligopoly or monopoly exists.

The ethics of the [competitive] market demands that there be uncertainty, doubt, and certainly no equilibrium longer than the flash of a second on a computer terminal.