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Strict diagonal dominance in asymptotic stability of general equilibrium
Fixed Point Theory and Applicationsvolume 2013, Article number: 225 (2013)
Stability of general equilibrium is usually depicted by a dynamic process of price adjustment which makes the flow of prices eventually come to rest at certain prices, so that the supply and demand of every commodity tend to equal each other. Here we construct a dynamical system of a competitive economy and find that the strict diagonal dominance of the Jacobian matrix of the excess demand function at its equilibrium guarantees the asymptotic stability.
MSC:37N40, 91B55, 93D20.
Dedicated to Professor Wataru Takahashi on the occasion of his seventieth birthday
Economists look for conditions that make the equilibrium under consideration stable. For example, in , Arrow, Block and Hurwicz establish the stability on the assumption that the underlying excess demand function encoding the dynamics satisfies some gross substitute conditions; in , Uzawa also supposes that a gross substitute condition prevails and that the stability is guaranteed by using Lyapunov’s stability theorem; in , Bear finds the equivalence of the stability of ‘lagged’ systems and ‘first-order aggregation’ of lagged systems. Our condition is that the excess demand function has a strictly diagonally dominant Jacobian matrix at its equilibrium. Conditions of this sort can also be found in [4, 5], where Hadar assumes the excess demand function to have a strictly diagonally dominant Jacobian matrix at not only a single point, but everywhere. By using a contraction technique, Hadar is able to show that the dynamical system has a unique equilibrium which is globally stable. In spite of the stronger conclusion, the assumption made in [4, 5] imposes too strong restriction on the excess demand function as stated by Hadar. Here we construct a dynamical system of a competitive economy and find that the strict diagonal dominance of the Jacobian matrix of the excess demand function at its equilibrium guarantees the asymptotic stability. Our analysis is based on the estimation of the range of eigenvalues and solving recurrences and concludes the local stability of the general equilibrium.
We begin with a mathematical formation of the relations between supply, demand, and prices in an economy. Consider an economy with commodities . Each commodity has its own price . The vector is called a price system. While we say vectors and are demand and supply, respectively, the components and represent, respectively, the demand and supply of commodity i, . A vector is called an excess demand, while we think for some demand and some supply . Suppose that a price system p is given. Each consumer or producer in the economy will make consumption or produce commodities according to the price system p, resulting in a demand and a supply corresponding to p. The excess demand function is defined by . If there is a price system such that , meaning that the demand in each market is equal to the supply, then the state of prices and excess demand is called a general equilibrium of the economy.
The evolutionary process of the prices and excess demand is generated by the following method of price adjustment. Suppose that the economy has an excess demand and a price system at some time step. Then the price system at the next time step is given by
where is an diagonal matrix with for all , and . It can be seen from a direct computation that the price of a certain commodity increases (decreases) if the demand of the commodity is larger (less) than its supply, which is sensible. From the computation we also see that each represents the scale of how much the price of commodity i should be adjusted. Thus is considered as the adjustment speed of the price of commodity i. Now combining the excess demand function and the price adjustment gives the following discrete dynamical system of the economy:
where is defined by
In this dynamical system, a state variable represents a state of the economy with the first n components of x standing for the price system and the remaining ones standing for the excess demand.
Suppose , , and F is differentiable at . Then is a fixed point of ℱ (i.e., ) and is also a general equilibrium of the economy. Recall that the equilibrium of system (1) is Lyapunov stable if all sufficiently small disturbances away from it damp out in time. Recall also that the equilibrium of system (1) is attracting if all trajectories that start near approach it as . Furthermore, the equilibrium of system (1) is asymptotically stable if it is both Lyapunov stable and attracting. To show the stability of , we make the following assumptions:
every component of is not zero;
the Jacobian matrix is strictly diagonally dominant, i.e.,
for all .
Assumption (i) means that none of the commodities has a zero equilibrium price. Assumption (ii) means that each ‘own-good’ price effect dominates the sum of the effects of the respective price on all other markets. Assumption (iii) means that a price raise (decrease) of some commodity should reduce (increase) its excess demand. As demonstrated by the following theorem, will be asymptotically stable while the adjustment speeds of the prices lie in a suitable range.
Theorem 1 There is a such that the equilibrium of system (1) is asymptotically stable whenever .
To show this, let us introduce the following simple result.
Lemma 1 Suppose that A is a complex Jordan canonical form. If A is invertible, then there exists a upper triangular matrix B such that .
Proof Without lost of generality, we may assume that A is a Jordan block with diagonals for some nonzero complex number c. Let , , and for all . Define , where
Then a computation shows that . □
For a square complex matrix A, the notation denotes the collection of all eigenvalues of A.
Proof of Theorem 1 Let us first consider the dynamical system
where is defined by
Then is an equilibrium of system (2) and the Jacobian matrix of at is
where I, O, and are the identity matrix, the zero matrix, and the Jacobian matrix , respectively. Since and for all , there is a positive number K such that if , then
Now suppose . Let . If for some , then
Since is strictly diagonally dominant, so is RA. Hence, by Gersgorin theorem  and (3), for any eigenvalue α of RA we have
Suppose , where and . Then by (4) we have
Hence . Now implies , i.e.,
where denotes the real part of α. Suppose J is a Jordan canonical form of RA. Then by (5) we have
Therefore, for all , and hence there is an upper triangular matrix B such that by the lemma. For any ,
Thus by (4) we have
Thus and hence
Since B is upper triangular, it follows that all the eigenvalues of matrices lie in the open unit disc. For , put
Then by (6) we conclude that
Since RA is similar to J, the Jacobian matrix M of at is similar to the matrix
We claim that for ,
We shall proceed by induction. When , (8) follows from a direct computation. Now suppose (8) holds for . Then
Note that the identity shows that
Note also that
Hence (8) holds for , completing the induction and proving the claim.
Since M is similar to N, (8) and (7) imply that goes to the zero matrix as k goes to infinity, showing that every eigenvalue of M lies in the open unit disc, so that the equilibrium of system (2) is stable and attracting.
Next we claim that the equilibrium of system (1) is asymptotically stable. The notations and will denote the flow of system (1) and (2), respectively. The norm will stand for the supremum norm on . Let U be an open neighborhood of . Since every component of is not zero, there is a such that if . Without loss of generality, we may assume that , where
By the continuity of F at , there is a such that
Suppose , where and for all . By the asymptotical stability of the equilibrium of system (2), there is a such that if and , then
Suppose , where and for all . Since , there is an such that
Now choose so that and . Put and . Then a computation shows that
Moreover, by (12) we have
Since , (10) implies
Thus (9) gives
meaning that the equilibrium of system (1) is stable. By the continuity of F at , (11) shows that as . This completes the proof. □
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This work was supported by the National Science Council of the Republic of China.
The authors declare that they have no competing interests.
Both authors contributed equally and significantly in writing this paper. Both authors read and approved the final manuscript.