Method of analysis

We have so far discussed how prices and the rate of interest are determined in a particular period, the present week. We have, at the same time, also discussed the movement of prices but it was only the movement of groping prices which appears in the process of tatonnement – not the movement of temporary equilibrium prices through weeks. Effective prices, at which trade is carried out, are realized at the end of each week. In order to explain the movement of effective prices from week to week, we must not confine our investigation to the present week but extend it to future weeks. This chapter is devoted to this problem which has been left unexamined in the previous chapter, that is, to the analysis of the fluctuation of prices over weeks. This is, needless to say, a very important problem which is closely related to the problem of trade cycles or economic growth.

The problem of the fluctuations in prices over weeks consists of two subproblems. The first is the comparison of different prices of a good, in a particular week, in different circumstances. The second is the intertemporal relationship between prices in different weeks. The former is usually dealt with by comparative statics. We want to discuss the latter by using the analysis of comparative dynamics.

Let us first explain how comparative statics and comparative dynamics can be applied to the analysis of the fluctuation in prices. Let us use subscript i to signify the variables and the functions in week i.