On the Adjustment, Stability and Growth In Perfect Competition Estola,

We present a model of the behavior of an industry in perfect competition. A new feature in the modeling is the consumers’ role in the evolution of the industry. We show a link in between market behavior and economic growth at industry level. Growth may occur due to increases in technology or consumers’ wealth, due to a positive change in consumers’ preferences concerning this good or increasing returns to scale. The model is solved in a linear case; sufficient conditions for asymptotic stability in an autonomous nonlinear case are also given. In the autonomous linear case, the adjustment is exponentially damped where overshooting may occur. Samuelson’s (1941) model of infinitely quickly adjusting consumers and producers is shown to be a limit case of our model in the nonlinear autonomous case. (JEL C62, D41)