Advanced Mathematical Economics

Dynamics of Market
Price: The Time Path

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 Dynamics of Market Price: The Time Path

 
Price Adjustments over time:
Price adjustments over time
can be measured by the rate of
change of price over time; .
Mathematizing the
shortage/surplus in static
sense:

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 Dynamics of Market Price: The Time Path

 
Greater the shortage/surplus
in the market, more
responsive will be change in
price and vice versa.
(Price Adjustments) are
directly proportional to
(Excess demand)
Mathematically speaking:

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 Dynamics of Market Price: The Time Path

 
Developing an equation and
brining the constant of
proportionality .

Here , which means that the

relationship between and
shall be positive.
is, suitably, called the
‘adjustment’ coefficient.

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 Dynamics of Market Price: The Time Path

At equilibrium, no need for

adjustment in price over time
in equilibrium. i.e.
At equilibrium, there is no
excess demand in the market.

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 Dynamics of Market Price: The Time Path

 
i.e.
Putting the two values in

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 Dynamics of Market Price: The Time Path

 
Therefore, the adjustment
equation makes sense for
market equilibrium both in
dynamic sense as well as static
sense.
Now substituting the values of
and in Adjustment equation:

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 Dynamics of Market Price: The Time Path

Gathering terms containing .

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 Dynamics of Market Price: The Time Path

Comparing with the standard

form of First Order Differential
Equation:

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 Dynamics of Market Price: The Time Path

 
Here

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 Dynamics of Market Price: The Time Path

 Choice of Case of the

Differential Equation:
; as and are positive, the value
of shall be some positive
constant. i.e. – Non-
Homogenous Case.
; as and are positive, the value
of shall be some positive
constant. i.e. – Non-
Homogenous Case with .

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 Dynamics of Market Price: The Time Path

 
Therefore, using the definite
Solution of time-path of :

Emphasizing on the values to

be substituted:

Substituting values of , and ,

respectively:

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 Dynamics of Market Price: The Time Path

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 Dynamics of Market Price: The Time Path

Let

Definite Time-path for the

Market Equilibrium in Dynamic
Sense.

END

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