Couple of months ago I have started a series of posts on price formation in the free market or how and why the free market does (not) work.

In the first part of the series we have discussed economic laws of supply and demand. We have also mentioned the "sweet spot" of the supply-demand model - equilibrium price. But we did not cover how one would discover the equilibrium price.

In the second part we have discussed a simple example in which printing press failed to predict the demand for the book. We have discussed how non-optimal prices as well as certain dynamics might emerge.

In this installment (a third part) of the series, we discuss another classical, but more sophisticated, model, which attempts to explain what happens if the knowledge about supply and demand laws is not perfect. The cobweb model aims to show how the self-organized optimal prices emerge over time. Note that we have already discussed (see this post) how self-organized price emerges from the Kirman model and that this price is far from reflecting underlying economic values.

Previously we have recommended people willing to reuse or modify our code to simply view the source code of our interactive html/javascript apps. Over the last few days we have updated our interactive app development workflow and this method will no longer work. When viewing the source code in your favorite browser, you will now see the minified (uglified) code. While the apps should still work as usual, it would be hard to modify them. We have setup a github repository for our development code (see https://github.com/physrisk/model-repository).

While we are at it, we have also setup a github repository for our content (see https://github.com/physrisk/website-source). This repository will store markdown files of our posts and pages.

Couple of months ago I have started a series of posts on price formation in the free market or how and why the free market does (not) work.

In the first part of the series we have discussed economic laws of supply and demand. We have also mentioned the "sweet spot" of the supply-demand model - equilibrium price. But we did not cover how one would discover the equilibrium price.

What I did not notice previously, until revisiting the topic while writing this post, is that the supply and demand laws should be stated as areas and not curves. The simple logic is that if you sell, you are keen to sell at no lower than some price. You will be obviously happy to sell at higher price. Hence for the supplier any point on or above supply curve is desirable outcome. The same logic applies to the demand curve - buyers are happy to buy at some price or lower.

As long as you have data, you might pull something useful out of it. We see this in Steve Mould's talk from the Just for Graphs show. See the video below.

Here we will briefly present another classic agent-based model - Axelrod's model [1]. In his article Axelrod argues that culture is formed through social interactions, that it is "something people learn from each other". Hence he presents a model which describes competition between cultural traits via social interactions between the agents.