In the first half of this lecture, I show that even if all consumers were utility maximizers whose individual demand curves obeyed the “Law of Demand”, the market demand curve derived from aggregating these consumers could have any shape at all. This result, known as the “Sonnenschein-Mantel-Debreu Conditions”, is actually a Proof by Contradiction that market demand curves do not obey the “Law” of Demand, and therefore that Marshallian partial equilibrium modeling of individual markets is invalid–let alone the Neoclassical practice of modeling the entire macroeconomy as a single agent in “Dynamic Stochastic General Equilibrium” models.
In the second half, I show that even if the market demand curve were valid, supply and demand analysis is still impossible. A supply curve that is independent of the demand curve can only be derived if firms set price equal to marginal cost, which neoclassical economists claim is the consequence of profit-maximizing behavior by competitive firms. I show: that equating marginal cost and marginal revenue does not maximize profits; that therefore if firms from different industry structures faced the same costs, the amount produced is independent of the number of firms in the industry and corresponds to the so-called “monopoly” level of output. In this case, a supply curve cannot be derived.
Here are the Powerpoint files for this lecture: Part 1; Part 2.