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Price Theory’s Distinctive And Familiar Characteristics

Price Theory

E. Glen Weyl

Microsoft Corporation (NASDAQ:MSFT) Research New England; University of Chicago

Journal of Economic Literature, Forthcoming

Abstract:

I survey the literature on "price theory," defined as neoclassical microeconomic analysis that reduces rich and often incompletely-specied models into "prices" sufficient to characterize approximate solutions to simple allocative problems. I argue that this definition is more descriptively accurate today, coherent through history and useful than are alternative definitions. I illustrate my definition by showing how it naturally leads to price theory's distinctive and familiar characteristics: its affinities to other disciplines, approach to measurement and use of diagrams and problem sets. I trace the origins of price theory from the early nineteenth century through its segregation into the Chicago School in the last quarter of the twentieth. I suggest that this relative scarcity combined with natural complementarities between price theory and work outside the tradition have fueled a recent resurgence of price theory in fields ranging from market design to international trade. This, in turn, has raised the value of developing more rigorously the approximation methods used in price theory, a literature still in its infancy.

Price Theory - Introduction

The whole state of the universe at one moment may perhaps be said to cause its whole state at the next moment, but when we say "A" is the "cause" of "B" we always assume that other things are equal..."The" cause of a phenomenon is merely that one of its necessary conditions which is for some practical reason crucial, generally from the standpoint of control.

- Frank Knight, Risk, Uncertainty, and Profit

This project is dedicated to the memory of Gary S. Becker, who first inspired my interest in price theory.

Definition

In this paper I survey the contributions and methods of the literature on "price theory". This literature has deep historical...


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