4 - Price Rigidities and Rationing

Abstract

Perfect competition is a basic assumption in classical economic theory. This implies that all agents in the economy are price takers and, therefore, express their demands and supplies of the commodities given the prevailing prices. A market is in equilibrium if total demand is equal to total supply. Trade will only take place at equilibrium prices. It is assumed that there are no restrictions on the prices and that price adjust infinitely fast. The models of Drèze and Benassy differ in the way they describe the behavior of the individual agents under quantity rationing. In Drèze's model, the agents express their rationed demands and supplies, that is, on each market, the agents' demands and supplies satisfy the imposed rationing scheme. In the model of Benassy, the agents express their effective demands and supplies. It reflects the agent's demand or supply for a commodity when the agent takes into account only the rationing on the other commodities. For Drèze's model, the expressed and realized quantities of trade are in equilibrium equal to each other, while in the model of Benassy, trade is realized through assignments induced by the effective demands and supplies. The rationing of supplies seems to occur much more frequently than rationing of demands. Rationing of the supplies has a serious impact on the income of the rationed agents.