The traditional approach to the analysis of the price formation process and of market phenomena in general is that the demand schedules and the supply schedules together determine the prices, so that, if both sets of schedules are assumed, it has no sense to ask what will happen if such and such a change in price occurs. If it is wanted to consider the effect of price changes in the traditional scheme, this effect must be looked upon only as a potential effect, say the effect that would be produced on the quantities demanded if the demand schedules remained unchanged while shifts (sufficient to produce the given price changes) occurred, in the supply schedules. Or vice versa. For many purposes it is more satisfactory to work with a theoretical scheme which is such that it is possible to assume at the same time a given demand and supply structure and still ask the question of how the quantities traded will react under the impact of price changes. An outline of – or rather prolegomena to – such a theory is given in this paper.

Such a modification of the traditional demand–supply set up seems particularly necessary for analytical purposes in international trade, and in what follows I shall most of the time speak about ‘countries’, ‘International trade’, etc. But the argument is general and has obvious applications to other parts of economic theory.