January 01, 2017

A mathematical model of demand-supply dynamics with collectability and saturation factors

  • Li C.
  • Yang H.

We introduce a mathematical model on the dynamics of demand and supply, incorporating collectability and saturation factors. Our analysis shows that when the fluctuation of the determinants of demand and supply is strong enough, there is chaos in the demand-supply dynamics. Our numerical simulation shows that such a chaos is not an attractor (i.e. dynamics is not approaching the chaos), instead a periodic attractor (of period 3 under the Poincare period map) exists near the chaos, and co-exists with another periodic attractor (of period 1 under the Poincare period map) near the market equilibrium. Outside the basins of attraction of the two periodic attractors, the dynamics approaches infinity, indicating market irrational exuberance or flash crash. The period 3 attractor represents the product's market cycle of growth and recession, while period 1 attractor near the market equilibrium represents the regular fluctuation of the product's market. Thus our model captures more market phenomena besides Marshall's market equilibrium. When the fluctuation of the determinants of demand and supply is strong enough, a three-leaf danger zone exists where the basins of attraction of all attractors intertwine and fractal basin boundaries are formed. Small perturbations in the danger zone can lead to very different attractors. That is, small perturbations in the danger zone can cause the market to experience oscillation near market equilibrium, large growth and recession cycle, and irrational exuberance or flash crash.

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