Erratic Dynamics in a Restricted Tatonnement Process with Two and Three Goods

Summary

It is well known that adjustment processes like tatonnement can show erratic dynamic behavior. The path of prices generated in such a process generally shows big jumps and varies over a wide range. This is not acceptable. A discrete tatonnement process in simple two and three goods exchange economies is studied. It is shown that in the examples studied, the region in which the prices can vary can be restricted to a neighborhood of an equilibrium, if the relative price adjustment is restricted by a maximal rate of increase or decrease of the price. Within the interval any type of erratic dynamics remains possible.