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> The supply and demand model only applies to analysis of microeconomic systems with perfect competition I'm going to stop right there. Perfect competition is

> The supply and demand model only applies to analysis of microeconomic systems with perfect competition I'm going to stop right there. Perfect competition is unnecessary. Part of perfect competition is perfect information. No transactions have perfect information. There is always "risk" involved. And risk contributes to determining the price of something. Ever wonder why used cars lose a third of their value when you drive a new one off the lot? It's because of the risk that a person might be selling that almost-new car with a hidden expensive fault in it. Also, risky investments come with higher returns. Safer investments come with lower returns. The lack of perfect information gets a dollar value for the amount of imperfection. Risk is absolutely part of the free market, and absolutely a part of the Law of Supply and Demand.

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nrr 2mo ago
> I'm going to stop right there. Um, OK. > Perfect competition is unnecessary. It is definitionally a precondition to applying the supply and demand model for analysis. > Part of perfect competition is perfect information. This is mostly correct. It's actually a biconditional: perfect competition iff perfect information. > No transactions have perfect information. This is correct. > There is always "risk" involved. And risk contributes to determining the price of something. Risk (due to Frank Knight, sometimes called Knightian risk) is a term of art that refers to known probability distributions of market outcomes. My professional training is literally to build pricing models against these. > Ever wonder why used cars lose a third of their value when you drive a new one off the lot? It's because of the risk that a person might be selling that almost-new car with a hidden expensive fault in it. No, I can't say I've ever wondered this; I've not been around a lot of new cars. (See also: the whole Mennonite thing.) I know that it's because of the term of art that we call uncertainty (again, due to Frank Knight, sometimes called Knightian uncertainty), which refers to those unknown probability distributions of outcomes that I listed as a precondition to applying this model for analysis. I can't price against those. A used car market is what we call an Akerlof market, which is a market with a feedback system that has a whole lot of pathologies linked to information asymmetry. This also happens to be the textbook example of adverse selection, which is itself an example of how the supply and demand model fails to predict the market due to that information asymmetry. > Risk is … absolutely a part … This is correct with the words written here, but I'll caution that risk as a term of art has been misused.

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nrr 2mo ago

> I'm going to stop right there. Um, OK. > Perfect competition is unnecessary. It is definitionally a precondition to applying the supply and demand model for analysis. > Part of perfect competition is perfect information. This is mostly correct. It's actually a biconditional: perfect competition iff perfect information. > No transactions have perfect information. This is correct. > There is always "risk" involved. And risk contributes to determining the price of something. Risk (due to Frank Knight, sometimes called Knightian risk) is a term of art that refers to known probability distributions of market outcomes. My professional training is literally to build pricing models against these. > Ever wonder why used cars lose a third of their value when you drive a new one off the lot? It's because of the risk that a person might be selling that almost-new car with a hidden expensive fault in it. No, I can't say I've ever wondered this; I've not been around a lot of new cars. (See also: the whole Mennonite thing.) I know that it's because of the term of art that we call uncertainty (again, due to Frank Knight, sometimes called Knightian uncertainty), which refers to those unknown probability distributions of outcomes that I listed as a precondition to applying this model for analysis. I can't price against those. A used car market is what we call an Akerlof market, which is a market with a feedback system that has a whole lot of pathologies linked to information asymmetry. This also happens to be the textbook example of adverse selection, which is itself an example of how the supply and demand model fails to predict the market due to that information asymmetry. > Risk is … absolutely a part … This is correct with the words written here, but I'll caution that risk as a term of art has been misused.