My question is simple: in theory, why should we expect the total quantity that firms want to sell to be (at least approximately) equal to the total quantity that consumers want to buy?
As I understand it, the standard explanation is something like this. If supply were greater than demand (for instance), then there must be some 'frustrated' sellers who cannot sell all of the units that they want to sell. Instead of paying the market price, buyers could therefore pay a lower price to these sellers while still buying all the units that they want to purchase. This pushes the price downwards, a process that continues until supply equals demand.
I find this kind of explanation unsatisfying for two reasons:
- In the standard framework of competitive equilibrium, agents choose quantities (and view prices as fixed). And yet, the disequilibrium adjustment story here relies on price setting.
- The explanation is highly informal. As a result, it is unclear what assumptions are necessary for it to hold and when we should expect supply to equal demand.
I would be very grateful if anyone could improve on this explanation.
Edit: what I am looking for is a rigorous story explaining why:
If the number of units that producers want to sell exceeds the number that consumers want to buy, the price will fall.
If the number of units that consumers want to buy exceeds the number that producers want to sell, the price will increase.
This is a very fundamental assumption in economics so I think deserves a good answer on economics SE (apparently, not everyone agrees, judging by the recent downvotes!)
The puzzle (for me) is how this can happen in an environment when everyone views the price as given (i.e. the standard model of perfect competition).