Equilibrium in Stochastic Economic Models

Abstract

This chapter discusses the equilibrium in stochastic economic models. Much of the analytical work in economic theory is devoted to the characterization of some sort of an equilibrium or a steady state. An equilibrium is typically a state of the system satisfying some basic consistency conditions that make it self-perpetuating once it is attained. Perhaps the simplest example is that of an equilibrium in a single market in which demand and supply of the commodity are functions of the price of that commodity alone. An equilibrium price vector has the property that planned demand equals planned supply. In particular, if the prevailing market price is an equilibrium price, there will be no pressures for bringing about a change in the price. The chapter discusses briefly some conceptual problems in defining an equilibrium or a steady state in stochastic models in economics. A dynamic model of resource allocation under uncertainty that has direct relevance to some practical planning problems is analyzed. In this model, the planner follows the classical rule of price-adjustment by raising the price when there is excess demand and lowering the price when there is excess supply.