Toward a more sensible model

It is now time to consider developing the models so far considered in the direction of our final goal. We must allow production and consumption to take place out of equilibrium. More important, we must allow agents to realize that they are not in equilibrium and to act on arbitrage opportunities as they occur. This fundamentally requires that agents be permitted to do two things. First, they must recognize that prices may change. Second, they must recognize that they may not be able to complete their desired transactions. In forming their consumption and production plans, agents must take these things into account.

The fact that agents may not be able to complete their transactions is not unrelated to the fact that prices can change. Agents who believe that they face transaction constraints are also likely to believe that prices in markets with such constraints will change. This is particularly likely in a Hahn Process world of orderly markets in which agents can take their own inability to purchase as reflecting a general short supply. Moreover, agents facing such constraints may themselves make price offers to get around them.

Handling all of this is a tall order and is best done in pieces. In the present chapter, I consider in general how the analysis so far developed can be adapted to deal with these matters. The details - which are often very interesting indeed - are explored later on.