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In: Economics

what is understanding of converge towards an equilibrium price of Richard Cantillion?

what is understanding of converge towards an equilibrium price of Richard Cantillion?

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Expert Solution

He was the first to explain the price relationship, between supply and demand. His market price theory has been widely debated in different ways by Adam Smith, David Ricardo, Ludwig Von Mises, Hayek and Milton Friedman (cf. demand and supply in quantity theory of money) since he is generally regarded as belonging to a class of the 'Austrian'/capitalist school of economics. Such latter thinkers promoted different versions of the 'equilibrium' market price theory; which notes that demand exceeds cost of output as more rivals and alternatives enter the supply market. Yet Cantillon 's work was far more complex than his latter students, and in many respects much further ahead. His market price thesis 'supply and demand' was based entirely on the assumption that the markets are constantly fluctuating and have irrevocable uncertainty.
To Cantillon, there will never be a price 'equilibrium,' no more than the supply balance will ever be. According to Cantillon, the markets are guided by several unpredictable uncertainties that make any estimate irrelevant: whether in terms of 'equilibrium,' cost of production, or price of the commodity. According to Richard, the entrepreneur must price as the market dictates according to the study of supply and demand; any other 'consideration,' irrespective of how important the calculation is to the profitability, viability or survival of the company. His theory of "market price," however, is much simpler and 'abstracts' several variables that are typically worried over by conventional economists, who are far from real economic activity. For Cantillon, the most paramount supply factor in pricing is. A product or service that is commonly available, loses its interest. He is committed to creating a consumer demand and controlling or restricting a commodity's supply, rather than 'looking out' for certain variables that may affect his quality. Cantillon's strategy can seem simplistic and naive on the surface. But because he was more interested in 'making the most confusion' than in 'accuracy' Others may argue that his theory relates mainly to commodities like capital (because he was a banker himself), and not so much to goods or consumables on the market. Cantillon, however, did not foreshadow the classic equilibrium theory that production costs represented the long-run, and hence probably the most relevant, determinant of market price. On the contrary, the cost of production for Cantillon had a very different function: to decide whether a company could make profits or should suffer losses and leave the business.


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