Gravitation of Market Prices Towards Normal Prices: Some New Results

Abstract

The gravitation process of market prices towards production prices is here presented by means of an analytical framework where the classical capital mobility principle is coupled with a determination of the deviation of market from normal (natural) prices which closely follows the description provided by Adam Smith: each period the level of the market price of a commodity will be higher (lower) than its production price if the quantity brought to the market falls short (exceeds) the level of effectual demand. This approach also simplifies the results with respect to those obtained in cross-dual literature. At the same time, anchoring market prices to effectual demands and quantities brought to the markets requires a careful study of the dynamics of the 'dimensions' along with that of the 'proportions' of the system. Three different versions of the model are thus proposed, to study the gravitation process: i) assuming a given level of aggregate employment; ii) assuming a sort of Say's law; iii) and on the basis of an explicit adjustment of actual outputs to effectual demands. All these cases describe dynamics in which market prices can converge asymptotically towards production prices.

Production of commodities by means of commodities and non‐uniform rates of profits

“…Bellino and Serrano () discuss the relevance of the centre of gravity assumption by studying the conditions that would allow market prices to converge towards normal or production prices. Their definition of normal or production prices is the one in which there is a long run uniform rate of profits in the two sectors considered.…”

“…They impose the long-run condition to be that of (unique) uniform rates of profits and conclude that convergence is statistically realized as time tends to infinity. Bellino and Serrano (2017) discuss the relevance of the centre of gravity assumption by studying the conditions that would allow market prices to converge towards normal or production prices. Their definition of normal or production prices is the one in which there is a long run uniform rate of profits in the two sectors considered.…”

The Gravitation of Market Prices as A Stochastic Process

“…We shall therefore just recall that while it is possible to construct models in which the natural position is an unstable equilibrium, there are reasonable assumptions bringing about equilibrium stability. Readers are referred to Boggio () and Bellino () for an overview of these results…”

“…Therefore: r n,t ( π t‐1 ,π t ):= ( π n,t – Σ a n,j ⋅π j,t‐1 – ℓ n ⋅w )/ Σ a n,j ⋅π j,t‐1 . See also: Lager () and Bellino (, pp. 63–4).…”

“…The Gravitation of Market Prices equilibrium, there are reasonable assumptions bringing about equilibrium stability. Readers are referred to Boggio (1990) and Bellino (2011) for an overview of these results. 16…”