Dynamic Adjustment of Supply Constrained Disequilibria to Walrasian Equilibrium

Abstract

It is well-known that the classical Walrasian tatonnement process of adjusting prices does not need to converge. In several papers Weddepohl has shown cyclic or even chaotic behavior in discrete time tatonnement processes. Starting from a trivial non-trade disequilibrium with complete rationing on the supplies at a given vector of initial prices, a quantity and price adjustment process is proposed, converging always to a Walrasian equilibrium. At any price and rationing system generated by the process all markets clear, only supply rationing occurs, in the short run only rationing schemes are adjusted and in the long run both prices and rationings are adjusted. Furthermore, prices can only take values equal or above their initial values, while supply rationing only may occur when the corresponding price is on its initial value.