Does the Equilibrium Model Work?

[@MarginalRevolutionUniversity]

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[@zackolguin3916]

It's neat to see that people always ended up going towards the same price point or equilibrium. It's something that happens unconsciously. It is fascinating that someone could pick up on this and even prove it with an experiment. Good job Smith

[@hardikmuley1610]

Zack Olguin, not a good job. This video is half knowledge. General equilibrium theory cannot explain the formation of bubbles and deflationary spiral. Smith's experimental setup wasn't good enough to predict the exact human behaviour because he didn't give the students opportunity to hoard money. It's true that human beings respond to prices but they also respond to rate of change in prices. When price of a commodity increases, people will rush to buy that commodity thus shifting the demand curve upwards because if they buy later they will have to pay more money. When price of a commodity decreases, people will delay their purchase thus shifting the demand curve downwards because if they buy later they will be paying less. This shift in demand curve creates new equilibrium point and prices will start shifting to the new equilibrium point thus shifting the demand curve again. It works like a positive feedback loop which never settles to a point. This is a simple explanation of formation of bubbles. When prices rise, demand curve shifts up and bubbles are formed. When prices fall, demand curve shifts down and deflationary spiral is triggered.

[@bamababyyy20]

Thank you

[@nicholasanderson9019]

Thanks for this excellent series

[@cesarsosa4617]

Forgot to mention Dr Vernon also found this model does not work for speculative goods such as stocks, that is why bubles form.

[@ElizabethHofmann-lq2nm]

We played the SC game at CMU . One winning strategy was to buy up all suplies so that the competition could not buy and had to stop production . A clear violation of the equilibrium model.

[@macsnafu]

Vernon Smith's experiment sounds interesting, but I'm not sure how strong a proof that is for the equilibrium model. Just as in the supply and demand curves used in previous videos, Smith arbitrarily decided on the values that the buyers and sellers would have in his market model. Don't get me wrong, I think the equilibrium model is valid, but I want stronger proof to argue for it. It would be nice to show somehow that real life buyers and sellers already have their own set of values for supply and demand. Historical examples help, but still don't seem to be strong enough proof.

[@scientistmurshid]

If possible please add english subtitle to the video.Thanks for your nice informative classes.

[@MarginalRevolutionUniversity]

Hi Munzur, We have English subtitles for most of our videos. :) On the video player at the bottom, look for the button with "CC" and click to turn on closed captions. -Meg

[@devdaynite]

Sir, how to identify the equilibrium price for a product in a day to day life market?

[@alexanderpalmer9131]

aint possible modle is just theoretical, not at all empirical

[@alexanderpalmer9131]

Look up the identification problem in econometrics, it questions the ability to calculate on supply/demand models given you dont know the value of variables and thus such calulations fill no real purpose. That is my main issue with micro economics in general, all the math you use to calculate theories instead of empirical data. Same with calculating on utility. Theories are interesting but math should not be the tool used!

[@davideagen8653]

I love this video, written by academics. No matter how many times the reflexive process disproves the equilibrium model the people who believe continue to believe. I cannot wait for people who watch this to put their money to work in the markets. For people who want to learn what reality is then yes please do study the equilibrium model but remember that the markets are only in equilibrium for a certain amount of time (lets just use 95% for argument sake), but the other 5% of the time are in extreme reflexive processes (brought on by innovation or price fixing it doesn't matter). When the reflexive process does happen all the gains the equilibrium models have brought are wiped out and an even greater loss occurs. If this process worked then why are there so many in real time that believe in this model continue to fail? Show me one real life example of a someone (hedge fund, investor, government, central bank, etc.) that has actual done this successfully.

[@macsnafu]

David Eagen I would note that this is a pretty basic and early economics lesson that is a foundation for later, more complicated economics. I don't know what Cowen and Tabarrok specifically think, but I think that the equilibrium is a good model for supply and demand, but that it *is* just a model. In real life, I'd say that equilibrium is *rarely* reached, if ever. Instead the equilibrium price is merely an incentive that creates a tendency towards equilibrium. Prices, supply, and demand don't change automatically, they are changed by human beings over time as they respond to existing incentives in the current economic situation. As the economic situation changes, so too do the incentives change. The equilibrium model shows us how those incentives change, but the actual changes in real life are necessarily rougher, because in real life nobody really knows exactly what the equilibrium price is, it has to be discovered through trial and error. Even if the equilibrium price was reached at some point, it would change when economic conditions change, which is something that happens continually, as people act and react to the various factors in the economy. The video did show how key changes in the economy affected the price of oil, or do you not believe those changes were based on supply and demand? If I'm right, then your "extreme reflexive processes" are merely indicative in a larger than normal change in economic circumstances, and thus a larger than normal change in incentives and the equilibrium price. Talk of gains and losses only really matter to individual economic actors, and those who respond "better" and closer to the equilibrium price are better rewarded economically than those who are farther from the equilbrium price. Not everyone is equally proficient in business. And while some changes in supply and demand are fairly easy to predict, some changes are much less predictable. I would expect 'good' businessmen to predict what they can, and seek ways to hedge for what they cannot predict, and/or to respond more quickly when those changes occur.

[@ElizabethHofmann-lq2nm]

What about the Austrian school of economics? They would disagree?

[@liyexiang666]

double oral auction...... do u buy dippers in the real world in such market format?

[@joelj7812]

Push up the price

[@alhanhh1979]

Johnny John ty

[@jamiebrown8435]

Steve Keen would like a word...

[@npSylarpp]

its so funny to watch in the comments all the armchair theorists throwing out left and right their crack pot hypotheses , or more often, a complete misrepresentation of other peoples work

[@hardikmuley1610]

General theory of equilibrium is a big fantasy of free market. It has failed to answer the formation of bubbles. The main reason is that it considers that human beings responds only to prices, however they also respond to rate of change in prices. If the price of a commodity is falling people will wait for prices to fall even more thus shifting the demand curve downwards, because if they buy later they will be buying at even cheaper price. If the price of a commodity is increasing then people will buy that commodity as soon as possible thus shifting the demand curve upwards, because if they buy later they will have to buy at higher price. Shift in demand curve will create new equilibrium point and price changes again creating a positive feedback loop. So the equilibrium is never achieved. If the prices are rising, then a bubble is formed and if the prices are falling then a deflationary spiral is created.

[@shahzodxudoyberdiyev5596]

Hardik Muley love this answer. I am sure I have a lot to lear from you

[@alexanderbeauregard287]

Bubbles are created artifically by government intervention, not by free markets.

[@artemisrafti3956]

@@alexanderbeauregard287 No, bubbles are a natural feature of market dynamics. The supply and demand curves are interdependent (not independent as is often assumed), and they respond to the rate of change in prices. In other words, mathematically there are an infinite number of equilibrium points because we have too many variables. The only way equilibrium models yield definite solutions is when assumptions are being made, assumptions that are highly dubious and falsifiable. Nevertheless, to assert that government is the cause of bubbles instead of free markets is really a narrative that serves the interests of capital because they need a way to keep the state out of economic affairs. But the state is the only entity that can challenge capital, especially if the state is captured by large democratic forces. Your assertion is an ideological cover to justify a world where capital reigns supreme and social forces be subordinate to it.

[@yydd4954]

The bubble happen because of the monetary policy The lowering of interest rates confuses the Money The prices aren't real The real income is same but people spend more as the "aggregate demand" is increased by the monetary policy, entrepreneurs invest more and more and take rash decisions. The malinvestments is the point. Learn Hayek bruh if you wanna know about free market.

[@hardikmuley1610]

@@yydd4954 The bubbles happened even with gold standard currency, like the tulip mania bubble. Monetary policy can cause inflation, but not bubbles specific to an asset.

[@limaifoodmachinery2675]

nice

[@joelj7812]

Flex it's power ... Embargo

[@Andre-qo5ek]

this oil example is bull. without a full examination of the situation. "What you can see is that the price of oil skyrocketed. The big price increase makes sense because there aren't many good substitutes for oil in the short run." where is the data for demand trends? data for the federal oil reserve levels? corporate profits? import export quantities of oil? fuel regulations for quality? inflation of currency, inflation of quality of life goods? technology changes? way too many factors play into this to try to use it as an example of supply and demand equilibrium. corporations use propaganda, fear mongering, artificial shortages, speculative pricing, pricing fixing, and simply just personal greed. They get tax breaks that manipulate costs. not the mention their environmental and humanitarian crimes are over looked and not taken into account to the totality of the cost of the products that are created.

[@SudevSudheer]

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[@ethio_classic4070]

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