On a Class of Dynamic Demand Functions

Abstract

The idea that demand functions may involve time (or, more precisely, the notion of “earlier and later”) goes back a long time. It was elaborated in the theoretical work of Roos (1925) and Evans (1930), and its implications for empirical research were perhaps first brought out in studies of the demand for cars [De Wolff (1938); for other references see Houthakker and Haldi (1960)]. Recently the same idea has been applied more generally by Stone and Rowe (1957) and Nerlove (1959). While the general approach followed in these empirical studies has considerable intuitive appeal, the underlying theory has never been spelled out in any detail.The basic notion is that of a desired stock, actual demand during a time interval being related to the gap between the desired and the actual stock. Thus it is often assumed (partly by analogy with certain models of expectations) that the rate of demand is proportional to this gap, which leads to an exponential adjustment of actual to desired stock.