Value & Capital, CHAPTER X -- EQUILIBRIUM AND DISEQUILIBRIUM

In this first section of Chapter X, the author, Sir John Hicks, begins with a summary of the general method he will be using to apply equilibrium analysis to dynamic theory.  As described in Section 4 of the previous chapter, prices will be assumed to be set each Monday.  Everything that has happened up to that time must be treated as data, not subject to change.  In particular, we take as given "the whole material equipment of the community," including finished goods ready for sale, raw materials, and goods at every stage of production in between, along with the physical plant and durable consumer goods already purchased.  "From now on, the economic problem consists in the allotment of these resources, inherited from the past, among the satisfaction of present wants and future wants."

As described in Section 5 of the previous chapter, entrepreneurs and private persons are assumed to draw up plans for their conduct during the current week and in future weeks.  The plans of private persons include quantities of commodities they plan to purchase at present and at future times (and possibly quantities of services to supply).  The plans of entrepreneurs include quantities of inputs to production to be purchased or hired in the current week and future weeks, as well as quantities of outputs to be produced for sale at these times.

As explained in Section 6 of the previous chapter, these plans incorporate expectations about future prices. If the supply and demand in the current week cause the price of some commodity to differ from those expectations, the plans will be revised accordingly.

By assumption, trading happens on Monday and brings supply and demand into equilibrium;  this assumption "is essential in order for us to be able to use the equilibrium method in dynamic theory."  Hicks explains that the current discussion will not focus on the process by which equilibrium prices are formed (referring the reader instead to the end note of the previous Chapter).  "[O]ur method seems to imply that we conceive of the economic system as being always in equilibrium.  We work out the equilibrium prices of one week, and the equilibrium prices of another week, and leave it at that."