Modelling Demand Theory

4. Modelling supply and demand theory
The proposed model for a real world demand and supply estimate is based on two more general assumptions. First, both supply and demand curve’s slopes are supposed to be rather stable, but their positions are unstable, especially the demand curve position. One may imagine that first some people somehow raise money or credit and demand stuffs they need. Then each producer perceives the level of its individual demand and decides the price to bid and the production amount to launch. Next, buyers decide how much to buy depending on the price asked by sellers. Next, each seller decides to take the quantity sold as a satisfactory production level or to change his price and observe competitors actions and buyers’

Keynes’s idea on the subject is that “It is evident from the above that the level of employment at any time depends, in a sense, not merely on the existing state of expectation but on the states of expectation which have existed over a certain past period” (Keynes, 1936, p. 50). This does not mean that time must be included as an explanatory variable since “time” is not an exogenous variable germane to economic performance; what is exogenous is not “time” but the dynamic process that directs producers’ and consumers’ decisions to some theoretical realisation. This process obviously takes time, but it is an exogenous phenomenon in itself that most probably has no regular time performance suitable to time series

It is the average value which economic forces would bring about if the general conditions of life were stationary for a run of time enough to enable them to work out their full effect” (Marshall, 1890, p. 289). On the matter, Keynes stated that: “If we suppose a state of expectation to continue for a sufficient length of time for the effect on employment to have worked itself out so completely that there is, broadly speaking, no piece of employment going on which would not have taken place if the new state of expectation had always existed, the steady level of employment thus attained may be called the long period employment corresponding to that state of expectation. It follows that, although expectation may change so frequently that the actual level of employment has never had time to reach the long-period employment corresponding to the existing state of expectation, nevertheless every state of expectation has its definite corresponding level of long-period employment” (Keynes, 1936, p. 48). Robinson wrote that “The short period is here and now, with concrete stocks of means of production in existence. Incompatibilities in the situation (...) will determine what happens next. Long-period equilibrium is not at some date in the future; it is an imaginary state of affairs in which there are no