S-Shaped Price Dynamics Curve (PDC)

Analysis of a Market with Multiple Equilibria

Consider a market where the price in the next period ($P_{t+1}$) is a non-linear function of the price in the current period ($P_t$). The graph of this relationship, known as the Price Dynamics Curve (PDC), intersects the 45-degree line (where $P_{t+1} = P_t$) at three distinct price levels: $P_A$, $P_B$, and $P_C$, in increasing order. At intersections $P_A$ and $P_C$, the PDC is flatter than the 45-degree line. At intersection $P_B$, the PDC is steeper than the 45-degree line. Based on this information, which statement correctly classifies the stability of these equilibrium points?

Market Price Trajectory with Multiple Equilibria

Policy Evaluation in a Multi-Equilibria Market

Consider a market characterized by a non-linear price adjustment process, resulting in three equilibrium prices: a low-price equilibrium at $50, a mid-price equilibrium at $100, and a high-price equilibrium at $150. The equilibria at $50 and $150 are stable, while the equilibrium at $100 is unstable. If the current market price is $105, what is the most likely long-run trajectory for the price?

In a market with an unstable equilibrium price, any small, temporary price disturbance will cause the market price to move progressively further away from that equilibrium point.

A market for a particular asset is observed to have two distinct and persistent price levels. For long periods, the price hovers around a low value. However, a significant positive market event can cause the price to jump to a much higher value, where it then tends to remain. Similarly, a significant negative event can push the price from the high level back down to the low level. What does this observed behavior most strongly imply about the structure of this market?

A market's price adjustment process is described by a relationship between the current price and the next period's price. This relationship can be visualized as a curve on a graph where the horizontal axis is the current price and the vertical axis is the next period's price. A 45-degree line on this graph represents points where the price is unchanging. Match each observed market behavior to the corresponding feature of this price adjustment curve.

A market for a new technology has two potential long-run outcomes: a niche product with a low, stable price, or a mass-adopted product with a high, stable price. Market analysts have identified a specific intermediate price point. If the price rises even slightly above this point, positive feedback tends to drive the price towards the high-price outcome. Conversely, if the price falls even slightly below it, negative feedback tends to push the price towards the low-price outcome. In the context of price dynamics, this intermediate price point is best described as what type of equilibrium?

Policy Design for a Volatile Housing Market