ABSTRACT
KEYNES, a student of Marshall, introduced to modern macroeconomics the ideas of “aggregate demand” and “aggregate supply” but did not develop them as precisely as do current texts in macroeconomics.
NERLOVE introduced dynamics into the analysis of demand and supply with his “cobweb” model, applicable to an agricultural market. Demand for an agricultural commodity such as corn or wheat can respond immediately to a change in price, but supply decisions depend, in a world with no buffer stocks (grain reserves), on price in the previous year. This is because grain is sold at the harvest and then not planted until the next spring. Nerlove modelled the supply decision with what mathematicians call a difference equation, where quantity supplied this year depended in some way on last year’s price. The particular contribution of the cobweb model is that it could explain cyclical variations in price without relying on external shocks to demand or supply. The general contribution was to further the dynamic analysis of market price by applying appropriate mathematical techniques. Economists now routinely use difference equations in advanced econometric analysis to model dynamic changes in economic variables.
