Econ 4142 Group Assignment with a weight of 15 points

Remember the discussion on the difference in Marshallean and Walrasian approach of taking P or Q as independent variables in
identifying the stability of market equilibrium. The following question is about the stability condition of equilibrium when price is the
independent variable

P P

Ṕ Ṕ
QS= -c+vP D= a-bP

QD = a-bP S=-c+vP
Ǭ
Q Q
Ǭ

At equilibrium Qd=Qs . When Qd=Qs equilibrium price (Ṕ) is expressed as Ṕ = (a+c)/(b+v) and price is independent variable as in
Walrassian assumption. Price change with respect to time is proportional to the excess demand; ძP/ ძt = j(Qd –Qs) and hence the
time path of price ძP/ ძt = j(Qd –Qs) is expressed as ძP/ძt +j ( b+v)P= j(a+c) .

 Solve the non-homogenous differential equation,

 Relate the graphical expression above with an expression of the solution of the linear differential equation,
 Show the relationships of b and v (the slopes of the demand and supply curves above) in the solution of the linear differential
equation
 State the condition under which the time path is stable or unstable.( ref Alpha Chang).

### The non-homogeneous differential equation is expressed as:

dP/dt + j(b+v)P = j(a+c)

where j represents the proportionality constant between price change and excess demand.

This is a first-order linear differential equation with a non-homogeneous term. The general solution of this equation can be obtained
by solving the homogeneous and non-homogeneous parts separately and adding them.

The homogeneous solution is:

dP/dt + j(b+v)P = 0

This is a separable differential equation that can be solved by separating the variables and integrating both sides. The solution is:

P(t) = Ce^(-j(b+v)t)

where C is the constant of integration.

The non-homogeneous solution is:

dP/dt + j(b+v)P = j(a+c)

This can be solved by using the method of integrating factors. The integrating factor is e^(j(b+v)t), so multiplying both sides by this
factor gives:

e^(j(b+v)t) dP/dt + je^(j(b+v)t)P(b+v) = je^(j(b+v)t)(a+c)

The left-hand side is the product rule of differentiation, so it can be simplified as:

d/dt (e^(j(b+v)t)P) = je^(j(b+v)t)(a+c)

Integrating both sides with respect to t gives:

e^(j(b+v)t)P = (a+c)/j + Ke^(-j(b+v)t)

where K is the constant of integration.

The general solution is the sum of the homogeneous and non-homogeneous parts:

P(t) = Ce^(-j(b+v)t) + (a+c)/j + Ke^(-j(b+v)t)

### To relate the graphical expression above with the solution of the linear differential equation, we can plot the time path of price
(P) on the vertical axis and the excess demand (Qd - Qs) on the horizontal axis. The slope of the line representing the Walrasian
equilibrium is -1/j(b+v), which is the slope of the demand curve. The horizontal intercept of this line is (a+c)/j(b+v), which is the
equilibrium price. The line is downward-sloping, indicating that as excess demand increases, price decreases.

### The stability condition of the Walrasian equilibrium is determined by the sign of the slope of the excess demand curve, which is -
j(b+v). If this slope is negative, the time path of price is stable, meaning that any deviation from the equilibrium will result in a
negative feedback that returns the system to the equilibrium. If this slope is positive, the time path of price is unstable, meaning that
any deviation from the equilibrium will result in a positive feedback that drives the system further away from the equilibrium.
Therefore, the stability condition is: j(b+v) < 0.

### The slope of the demand curve is negative, which means that as the price of the good or service decreases, the quantity
demanded increases. The slope of the supply curve is positive, which means that as the price of the good or service increases, the
quantity supplied increases. The equilibrium price is determined by setting the quantity demanded equal to the quantity supplied,
which gives:

a - bP = -c + vP

Solving for P gives:

P = (a + c)/(b + v)

This is the equilibrium price expression.

The slope of the demand and supply curves, b and v respectively, affect the equilibrium price and the stability of the system. A
steeper demand curve (larger absolute value of b) implies a more responsive demand to price changes, which leads to a higher
equilibrium price. A steeper supply curve (larger absolute value of v) implies a more responsive supply to price changes, which leads
to a lower equilibrium price.

In the solution of the differential equation, the slopes of the demand and supply curves appear as the coefficients of P, b+v. The
stability condition of the Walrasian equilibrium is determined by the sign of this coefficient, which is j(b+v). If this coefficient is
negative, the time path of price is stable. If it is positive, the time path of price is unstable.

To summarize, the solution of the differential equation and the graphical representation of the Walrasian equilibrium show how the
equilibrium price and the stability of the system depend on the slopes of the demand and supply curves. When the slope of the
excess demand curve is negative, the system is stable, and any deviation from the equilibrium is self-correcting. When the slope is
positive, the system is unstable, and any deviation from the equilibrium is self-reinforcing.