A Quantum Model of Supply and Demand

Abstract One of the most iconic and influential graphics in economics is the figure showing supply and demand as two lines sloping in opposite directions, with the point at which they intersect representing the equilibrium price which perfectly balances supply and demand. The figure, which dates back to the nineteenth century, can be seen as a graphical representation of Adam Smith’s invisible hand, which is said to guide prices to their optimal level, and features in nearly every introductory textbook. However this figure suffers from a number of basic drawbacks. One is that it does not express a dynamical view of market forces, so it is not clear how prices converge on an equilibrium. Another is that it views supply and demand as deterministic, when in fact they are intrinsically uncertain in nature. This paper addresses these issues by using a quantum framework to model supply and demand as, not a cross, but a probabilistic wave, with an associated entropic force. The approach is used to derive from first principles a technique for modeling asset price changes using a quantum harmonic oscillator, that has been previously used and empirically tested in quantum finance. The method is demonstrated for a simple system, and applications in other areas of economics are discussed.