On Quantity Signals and the Foundations of Effective Demand Theory

This article describes how economic agents rationally formulate their demands when they perceive signals of quantitative disequilibrium. A general definition of effective demand is given for all types of rationing schemes. It is shown to include previously used definitions when rationing is nonmanipulatable, i.e. when each agent faces fixed bounds on his trades. If, on the contrary, he can manipulate these bounds through his demands, rational behavior is shown to lead to an explosive phenomenon of overbidding. Finally the theory is extended to include uncertainty and transaction costs.