Supply and Demand and common mistakes students make when using them


Three fundamental postulates of behavior underlie all of the analysis in these notes:

  1. Individuals act in their own self-interest, properly defined
  2. No free lunch
  3. No one needs anything


People act in their own self-interest. They are rational. People try to do things they like and avoid things they don’t like. People do make what we might call in common usage mistakes. A person may buy a car that turns out to be a lemon or marry a man who turns out to be unsuitable. But we assume that the person thought the decision wise at the time, given the available information. Ex ante, the decision was wise. Ex post, it was a mistake. More importantly, we expect that people learn from mistakes. If they buy a new brand of cereal that turns out to be too soggy for their tastes when they eat it, we don’t expect them to buy it again.

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