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Thread: Equilibrium & Economics

  1. #1 Equilibrium & Economics 
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    An essential concept of economics (in many schools of thought) is equilibrium. The theoretical advantages of equilibrium is well known.

    Of course there are numerous examples of economic equilibrium. Actually each mainstream model has an equilibrium point. Let's assume the most famous:

    Supply equals Demand (a+ bP= c- dP)

    Let's forget for a second how supply and demand curves are extracted (forget the logical fallacies of production function and utility function);

    1) Note that the above system is linear. As a result there's a unique equilibrium point in each system. If we search for any mainstream model we'll find that it is always linear.

    Now, let's assume that our systems/markets are not linear. Thus, they may have many possible equilibria: eg
    Supply equals demand in 2 points: A(P1,Q1) and B(P2,Q2)
    Supply curve is the same curve with Demand thus, we have infinite equilibria points (a+bP=a+bP, a=0 or for each a)
    A system/market (eg some financial markets) may be chaotic, so it may have various strange attractors (dx/dt= P(y-x), dy/dt= Rx-y-xz, dz/dt=xy-By)


    2) Also, in times where economy seems to be stabilized someone may assume that economy is in equilibrium. Thus, he may use linear systems to find out the equilibrium points. But, in cases where economy is destabilized (eg right now) is it justified to use models which assume that economy is always in equilibrium? eg Paul Krugman, has revived the old yet very famous IS-LM model. He even used it in his blog to describe what's going on right now, arguing that it's a great model for zero lower bound. Also, all DSGE models are as E indicates, equilibrium models. Should economists use equilibrium models when economy is clearly in inequilibrium?

    So, my question is,1) should we use non-linear models? Theoretically, it sounds logical but, does non linearity give better predictions and explanations? If so, how neoclassical equilibrium (static or dynamic) may be solved?
    2) Of course models are not equal to reality and many of their assumptions are not valid but, is it correct to assume equilibrium when it clearly doesn't exist? Should we explain crises by using equilibrium models or should we focus on non-equilibrium models?


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  3. #2  
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    If the supply is equalling demand ,where are the systems and markets as a separate unit coming in. You have to check whether your points have a corillation in reality. Do they?


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  4. #3  
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    Quote Originally Posted by Hill Billy Holmes View Post
    If the supply is equalling demand ,where are the systems and markets as a separate unit coming in. You have to check whether your points have a corillation in reality. Do they?
    In reality sold quantities equals bought quantities in a fixed price. That's just a tautology. There's not an observable, "palpable" demand function nor a supply function. Just 1 quantity and 1 price.
    I want to calculate theoretically this price (and quantity) so I may use the neoclassical theory, S=D. Clearly, S(p,t) and D(p,t) functions may have whatever theoretical features you want.
    Various indifference curves can give a dynamic demand function of the form of

    where ∇2 is the Laplacian. (c=constant).

    This as you may notice, is a wave. Thus if it equals a linear supply curve it is highly possible that they will intersect in more than 1 points.
    Now, if I wan't to estimate these functions in order to predict tomorrow's prices I'll come up with 2-3-4 or more possible combinations of price-quantity. Which one do I choose?

    Even if we use static analysis, Demand curve may be each polynomial, with no monotonic abilities. Again, if D(p)=S(p) I'll come up with 2 or more possible points of equilibrium. How do I know which one is the correct one? (note: The proposition of multiple equilibriums simultaneously in 1 market can be rejected as illogical. That's why we seek for 1 only equilibrium among numerous possible)
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    Fixed price? Ok price introduction as variable. Price relative to demand. Or price relative to supply. Predictiction using this method is not possible, even using good math. Good common sense and guessing seem to work because, price is a "market thing". I am thinking that if you can get the math on the market you will be correct.
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    Sorry, this was misplaced, it got moved
    Last edited by Hill Billy Holmes; November 18th, 2013 at 08:24 AM. Reason: Wrong thread
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  7. #6  
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    Quote Originally Posted by Hill Billy Holmes View Post
    Here is a funny example of the weird nature sometimes of base goods value. Rembrant visits the local hardware store and picks up a buck and a half gallon of paint and some crayons for color. He has spent about two bucks. He then gets home and splashes it on the canvas. His base goods value equals about two bucks. Why does his painting sell for two million?
    Because the added value is enormous.

    value of a product is determined by:
    w= c+v(+s)
    constant capital (c=raw materials, machines, etc)
    variable capital (v=wages, bonuses etc)
    surplus value (s)

    since his specific artistic production is not representative to competitive markets (in this case it's not a capitalistic production) we can say that (v1) contains (v)+(s)
    Thus: w= c+ (v1).
    So, 2.000.000$= 2$+ v
    You solve for v and you have an estimation of his added value. Of course, this added value also contains scarcity but this would be my answer.
    I see where you are coming from, sure, everything has a price. That doesn't mean that everything has a value. (I recently learned that in hong kong fresh air is sold in cans!!!)
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    Can the price be predicted in advance? If so how.
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  9. #8  
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    Quote Originally Posted by Hill Billy Holmes View Post
    Can the price be predicted in advance? If so how.
    Depends on the product and the time horizon. You just can't predict what's gonna happen automobile market in 10 years nor you can predict accurately prices for each asset/capital/money market.

    For mass production commodities though (industry, agriculture, etc) you can estimate with pretty good accuracy what is gonna happen in the short/medium term and you may predict some tendencies in the long term.

    I think the theory of value is the most appropriate theory for this kind of predictions. It's kinda difficult to explain it but in general the relative price of each good is highly related with the necessary work hours needed for its production as an average. In this very basic principle, profitability, time circulation of capital, etc expands the formula.
    in short it should look a bit simplified like this:

    (1) w= (1+R)(c+v)
    R=general rate of profit
    c= constant capital
    v=variable capital
    w= value

    (the very basic formula is: w=c+v+s where, s= surplus value)

    The market price should be expected to be very close to w. This equation (1) can be expanded by adding some more variables as monopolistic rate of profits, circulation times and more. Also, it is subject of continous disequilibrium. To put it simply, in the end of each period t, the "w" has to change even in steady state.

    Then, in order to take into account monetary events, you must use a short of monetary theory to predict forthcoming inflation/deflation which affects all prices.

    Empirically this method gives tremendously accurate predictions of market prices. Especially if you examine past time series.
    Future estimation is a stochastic prosedure. Therefore, you can not be sure 100%.
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    I was thinking of trying to deduce a science model for economics originating from the most simplistic trade. For example ,demand creating its own supply to equilibrium. Then from there it would, for whatever reasons, expand out to become separate as a demand. Then you would have both a supply and a demand. At that point the separate demand has become dominant, and trying to think as to why this would happen. As a dominant demand also, has the demand caused the "original" supply area to become like slaves. Just as an opinion, it seems to me that a strictly money aimed economy has a direct relation to a beggars market. Sure would be nice to get economies all straightened out for a change. Any thoughts?
    Last edited by Hill Billy Holmes; November 20th, 2013 at 12:44 AM. Reason: Goblins
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  11. #10  
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    I had previously used other economic models, some of which to no avail. Also asking someone who is consistantly successful or consistantly becomes rich their methods. Then there is also another way, After inserting the nickle cross your fingers and gently ease the handle down.
    Last edited by Hill Billy Holmes; November 21st, 2013 at 08:12 PM. Reason: bgr gbln
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