Peter Cooper — Disequilibrium Dynamics of Output and Demand

Theoretical studies of output and growth often focus on the behavior of equilibrium output. The usefulness of this approach depends on there being a tendency for actual output to converge on equilibrium output. With such a tendency present, studying the behavior of equilibrium output will tell us something about the behavior of actual output. It is therefore of interest to spell out the process by which an economy in disequilibrium is thought to tend toward equilibrium.

A first step is to consider the disequilibrium behavior of an economy that, for simplicity, is taken to be stationary (non-growing) when in equilibrium. This approach is adopted in the present post. The exercise is really preparation for considering a continually growing economy – a task that is left for a possible future post.…

The material in this post is somewhat technical but hopefully not difficult. Even so, the post is long (about 4000 words) and, for readers not already familiar with similar material, possibly a stretch to read all in one go. I considered separating the post into numerous shorter ones but felt that the loss of continuity would require too much repetition in setting up the discussion each time.

The post is divided into sections that provide natural stopping points for readers who wish to take breaks. The section titles are:

1. Macroeconomic Equilibrium
2. Disequilibrium Behavior
3. Adjustment Process
4. Adjustment in Simple Algebra
5. Convergence as a Power Series: λ = 1
6. Convergence as a Power Series: λ < 1
7. Adjustment of Growth Rates

heteconomist

Disequilibrium Dynamics of Output and Demand
Peter Cooper