Dynamic Analysis

• "Dynamic analysis may be defined as the study of the behaviour of systems, single markets or whole economics, in disequilibrium conditions." - Prof. Lipsey
• "Economic dynamics refers to those parts of economic theory where the problem of dating is conspicuously important." - Prof. Hicks
• "Economic dynamics is the study of economic phenomenon in preceding and succeeding events." - Baumol

• The word dynamics means “causing to move” or “bringing change”.
• In economics, dynamics is the study of economic change over time.
• Dynamic analysis asks:
  How did the present situation arise from the past?
  How will today’s decisions affect the future?
• Whenever we talk about a sequence of events (past → present → future), the time element enters our analysis.
• Economic dynamics therefore studies how economic variables (like price, output, income, population, capital) change through time, not just at one point.

Initial situation

• At first, market price is OP₁.
• At price OP₁, producers are willing to supply more than consumers are willing to buy.
• So, supply is greater than demand, and there is excess supply.

Adjustment process over time

• Because unsold stock remains, sellers start reducing the price.
• As price falls, buyers are willing to buy more, and some sellers reduce the quantity supplied.
• This process of falling price continues step by step.

Reaching equilibrium

• Finally, price settles at OP, where demand equals supply.
• At this price OP, the quantity bought and sold is OM.
• Point EE (where DD and SS intersect) is the equilibrium point.

Equilibrium path

• The arrow lines in the diagram show the path of price movement from the initial disequilibrium price OP₁ down to the equilibrium price OP.
• This path over time, not just the final point, is what we study in dynamic analysis.

• Growing population – the number of people increases over time.
• Growing capital – the quantity of capital (machines, tools, factories, infrastructure) increases.
• Improving production methods – technology advances and modes of production become more efficient.
• Changing industrial structure – inefficient firms are replaced by efficient firms; new industries rise as old ones decline.
• Changing habits and fashions – people’s wants, tastes, and customs change, leading to changes in the pattern of demand.

• Dynamics in economics means study of change through time.
• Static analysis compares equilibrium positions at a point; dynamic analysis explains how we move from one position to another.
• Time and sequence of events (past → present → future) are central in dynamic economics.
• In price determination, dynamic analysis traces the path of price adjustment from disequilibrium to equilibrium.
• Dynamic economies show growth in population, capital, technology, and changing habits and institutions.