Matti Estola

Consumer, Firm, and Price Dynamics: an Econophysics Approach: Modeling by Economic Forces Matti Estola

The assumptions of neoclassical analysis have prohibited the development of economics into a quantitative science. The assumptions do not allow modeling time dependent processes and increasing returns to scale in firms' production in a perfectly competed industry. Further, the assumed optimal behavior prohibits understanding changes in economic quantities because none likes to change his optimal behavior. In the book the assumption of optimal behavior in neoclassical analysis is changed to the following: Economic agents like to better their situation if possible. This approach is shown to lead to an analogous framework of modeling in economics as Newtonian framework in classical mechanics. The economic forces acting upon consumption, production, and price in a non-equilibrium situation are defined, and showed that these forces cause an adjustment toward an equilibrium state, or keep the system in motion with time. The proposed framework gives game theoretic analysis and a dynamic extension of neoclassical analysis from a single principle that contains economic growth too.