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Copy file name to clipboardExpand all lines: lectures/cobweb.md
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extension: .md
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format_name: myst
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jupytext_version: 1.14.1
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jupytext_version: 1.16.2
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kernelspec:
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display_name: Python 3 (ipykernel)
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language: python
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Our discussion and simulations draw on [high quality lectures](https://comp-econ.org/CEF_2013/downloads/Complex%20Econ%20Systems%20Lecture%20II.pdf) by [Cars Hommes](https://www.uva.nl/en/profile/h/o/c.h.hommes/c.h.hommes.html).
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We will use the following imports.
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plt.show()
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```
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## The model
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Let's return to our discussion of a hypothetical soybean market, where price is determined by supply and demand.
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($D(p_t)$ is the quantity demanded in some fixed unit, such as thousands of tons.)
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Because the crop of soybeans for time $t$ is planted at $t-1$, supply of soybeans at time $t$ depends on *expected* prices at time $t$, which we denote $p^t_{t-1}$.
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Because the crop of soybeans for time $t$ is planted at $t-1$, supply of soybeans at time $t$ depends on *expected* prices at time $t$, which we denote $p^e_t$.
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We suppose that supply is nonlinear in expected prices, and takes the form
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$$
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S(p^t_{t-1}) = \tanh(\lambda(p^t_{t-1} - c)) + d
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S(p^e_t) = \tanh(\lambda(p^e_t - c)) + d
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$$
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where $\lambda$ is a positive constant, $c, d$ are nonnegative constants and $\tanh$ is a type of [hyperbolic function](https://en.wikipedia.org/wiki/Hyperbolic_functions).
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Market equilibrium requires that supply equals demand, or
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$$
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a - b p_t = S(p^t_{t-1})
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a - b p_t = S(p^e_t)
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$$
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Rewriting in terms of $p_t$ gives
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$$
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p_t = - \frac{1}{b} [S(p^t_{t-1}) - a]
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p_t = - \frac{1}{b} [S(p^e_t) - a]
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$$
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Finally, to complete the model, we need to describe how price expectations are formed.
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```{math}
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:label: p_et
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p^t_{t-1} = f(p_{t-1}, p_{t-2})
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p^e_t = f(p_{t-1}, p_{t-2})
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```
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where $f$ is some function.
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