Price and Quantity Trajectories: Second-order Dynamics
Abstract
In two previous papers the author developed a second-order price adjustment (t\^atonnement) process. This paper extends the approach to include both quantity and price adjustments. We demonstrate three results: a analogue to physical energy, called "activity" arises naturally in the model, and is not conserved in general; price and quantity trajectories must either end at a local minimum of a scalar potential or circulate endlessly; and disturbances into a subspace of substitutable commodities decay over time. From this we argue, although we do not prove, that the model features global stability, combined with local instability, a characteristic of many real markets. Following these observations and a brief survey of empirical results for price-setting and consumption behavior in markets for "real" goods (as opposed to financial markets), we conjecture that Stigler and Becker's well-known theory of consumer preference opens the possibility of substantial degeneracy in commodity space, and therefore that price and quantity trajectories could lie on a relatively low-dimensional subspace within the full commodity space.
Cite
@article{arxiv.1204.3156,
title = {Price and Quantity Trajectories: Second-order Dynamics},
author = {Eric Kemp-Benedict},
journal= {arXiv preprint arXiv:1204.3156},
year = {2012}
}