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Economics Statics and Dynamics

Introduction

The term statics and dynamics have been brought into economics from theoretical technicalities devoid of any equivalence to it. We shall discuss in this chapter, the Economic Statics, Economic Dynamics, Postulations, Significance and Limitations.

Economic Statics

Static is derived from the Greek word 'Statike' which means fetching to a stand still. In physics, it means a state of rest where there is no movement. In economics, it entails a state characterised by movement at a particular level without any change. Static economy is an eternal economy where no transformation happens and it is essentially in equilibrium. Indices are attuned instantly and they are current demand, production and cost of goods and services. Samuel defines it as "Economic Statics concerns itself with the simultaneous and instantaneous or timeless determination of economic variables by mutually interdependent relations". There is neither history nor prospect in static state and hence there is no factor of ambiguity.

Economists in general explain static analysis in terms of micro and macro economic models.

Micro Statics

Micro statics is an economic model that refers to relationships among different economic variables in which one variable appears in more than one relationship. In this model the supply and demand associations determine prices at a point of time which are also constant through time. Let u assume the demand and supply functions as follows:

D = (P) ......... (1)

S = f(P) ......... (2)

From (1) and (2), we get D = S .......... (3)

Where D is the quantity demand of a commodity, S is the quantity supplied of that commodity and P is the Price. According to economists Hicks static economics is defined as "one in which certain key variables ( the quantities of commodities that are produced and consumed and he prices at which they are exchanged) are unchanging."

Macro Statics

Macro static investigation describes the static equilibrium situation of the financial system. It is defined by professor Kurihara as "If the object is to show a still picture of the economy as a whole, the macro static method is appropriate technique. For this technique is one of investigating the relations between macro-variables in the final position of equilibrium without reference to the process of adjustment implicit in that final position". Such a final point of equilibrium may be shown by the equation Y = C + I where Y is the total income, C is the total consumption expenditure and I, the total investment expenditure. It simply shows the eternal identity equation without any adjusting mechanism.

Economic Dynamics

It is the study of change, of increase of rate or decrease in rate. Prof.Ackley defines as "Dynamics is concerned essentially with states of disequilibrium and with change." It is the examination of the method of change which persists through time or over time. An economy may change through time in two ways: without changing its pattern and by changing its pattern. Economic dynamics relates to the latter type of change. If there is a change in population, capital, method of production, and forms of business organisation and tastes of the people - in any one or all of them - the economy will presume a diverse model, and fiscal system will vary its direction. Economists explain dynamic investigation in terms of micro and macro dynamic models.

Micro Dynamics - Cobweb Model

The cobweb model is used to explain the dynamics of demand, supply and price over long periods of time. There may be fragile agricultural merchandise whose prices and productivity are determined over elongated periods and they show cyclic arrangements. As prices go up and down in cycles, amount of output also seem to move high and low in an opposite cyclic mode. Such cycles in product prices and productivity are elucidated in terms of the Cobweb Model so named since the figure look like cobwebs. Now, let us construct a cobweb model of a Micro Dynamics and its postulations are given below.

Postulations

• The present year's (t) supply depends upon the previous year's (t-1) assessment regarding productivity level. Hence present productivity is prejudiced by last year's price, i.e. P(t-1) conclusions concerning productivity level. Hence present productivity is prejudiced by last year's price, i.e. P(t-1)

• The current year is divided into sub-periods of a week or fortnight

• The parameters determining the supply function have constant values over a series of years

• Present demand (Dt) for the commodity is a function of current price (Pt)

• The price likely to regulate in the present year is the actual price in the previous year

• The commodity under consideration is fragile and can be stored only for one year and both demand an supply functions are linear Based on the above postulations, we are going to construct cobweb models.
There are three types of cobwebs. They are: 1. Convergent 2. Diergent 3. Continuous.

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