I see this is an old thread, but I'm hoping to revive it a bit. First, thank you Allan for this post -- I found it by Googling something along the lines of "supply and demand is a lie," which really speaks to my inner turmoil here. I'm a beginning econ student (returning to school in mid-life as a stay-at-home mom, actually), and when I'm up late at night with the baby, I can't stop thinking about what's fishy about supply and demand. Normal, right? :) Here goes...
When we graph a supply curve, we start with the assumption that the quantity supplied is a response to a change in price; a given quantity is what a supplier will provide when they can fetch a given price for it. But then something strange happens when we start talking about surpluses and shortages that lead to convergence on the equilibrium price: all of a sudden, the suppliers are changing their prices as a response to quantity. We've reversed the independent and dependent variables, and we've violated the underlying premise of the supply curve, which is that the price on the supply curve is a reflection of how much is supplied as long as the suppliers get that price. When we talk about surpluses and unsold product, the supplier is no longer fetching the price on the y-axis, and that very same supply curve is no longer valid because we've changed the conditions of the universe that the curve was created in. Same for demand: we're initially graphing how quantity demanded depends on price assuming that any given quantity is available to meet that demand, but then we change the rules by superimposing a supply curve that creates a shortage, which invalidates the conditions under which the demand curve was created. It doesn't make sense to chart supply and demand curves on top of one another; they were drawn in different universes.
Supply alone and demand alone make sense, but using them together to find an equilibrium price--or to describe what happens out of equilibrium--doesn't make sense to me at all. While the S/D graph is a useful visualization tool to demonstrate S/D relationships and surpluses and shortages conceptually, it seems to me that it's mathematically completely wrong. It seems that there's no magical 'equilibrium' price where the S/D curves cross because that model depends on switching causality of the variables mid-game, and you can't have it both ways; the 'equilibrium' price has to be any point on the supply curve or demand curve because those are the assumptions of the creation of the curves.
I don't have a problem with the intuition behind the model, but I do take issue with what we're being told the model can be used for. I agree with Eric that a better way to present the information is like a "story" between buyers and sellers. But that story is getting turned into bad math ("bad" in my current understanding, anyway), and then all sorts of other insights are gleaned from that questionable foundation. So in moving forward with my indoctrination into the world of economic thought, I want to know exactly what's in the kool-aid I'm swallowing.
There's the nature of my inner turmoil in a nutshell.
I don't have a feel for how economists use the supply/demand model in the real world. How literal is this model? Again, I'd have no issue if it were just a conceptual diagram, but it is presented in texts and classes as a graph, as an actual mathematical phenomenon. Do economists actually use this as a mathematical model to analyze prices and markets and predict 'equilibrium' price?
And if S/D curves are used in the real world, how? Are S/D curves ever actually observable? Since supply and demand are constantly interacting to create market prices, one wouldn't be able to just look at price and quantity because you wouldn't be able to disentangle the effects from the supply side vs demand side, right? You'd just have a curve of what the 'equilibrium' prices ended up being from the combined effects of S&D?
And the shape of those curves... Couldn't a supply or demand curve take on many different shapes depending on the nature of the market? It seems to me that for a supplier, there's a window of profitability within which supply should match the demand curve as closely as possible (and outside of which, supply is zero). Why aren't the supply and demand curves more closely matched? Isn't it also important to consider where prices are coming from? Depending on how prices are set (whether the supplier is setting the price or responding to it), wouldn't the curves look very different?
If anyone can point me in the right direction for more resources on this, I'd be very grateful. I'm sure that if I'm asking these questions, they've been asked before, but I can't find much about it except this thread, and my attempt to discuss these issues with my professor failed. What am I missing here? Is there some fundamental issue that I'm just not understanding properly? If you've read this far in my diatribe, thank you. And thanks in advance to any respondents!