Dynamic Models of the Firm

Abstract

AbstractDynamic models of the firm applied to market intermediary behavior are reviewed and formulated. An important input that we have ignored so far is capital. Different models applicable to modeling capital, with special reference to agricultural models, are presented and discussed in this chapter. Both single capital input and multi-variate adjustment cost models are presented. The linkage between quasi-fixed inputs and raw material demand is highlighted. Inventories can be a source of dynamic adjustment of the firm. Dynamic inventory models are formulated to show how lagged inventory adjustment can lead to lagged adjustment in prices and input demands. I discuss some ways in which this model can be modified and extended for other applications. Expectations and lagged inventories through adjustment costs are shown to be significant factors in dynamic adjustment. Different models for expectations formation are presented, and the dynamic inventory model is specified for quasi-rational expectations. Other, mostly empirical approaches to modeling dynamic input demand behavior are also discussed.