On the Dynamics of Supply-constrained Equilibria

The paper defines a simple tâtonnement process of adjustments in prices and quantities, where excess demand results in nominal price increases and excess supply results in quantity rationing of supply at unchanged prices. Under reasonable assumptions, the process converges to a supply-constrained equilibrium. The result contributes to our understanding of how supply-constrained equilibria come about. ∗ Paper prepared for the proceedings of the Conference “Theory of markets and their functioning”, KNAW, Amsterdam, July 1998. I thank Roald Ramer for a perceptive remark on earlier work which eventually led to the present paper, and I thank Jean-Jacques Herings and Fabrizio Germano for their comments on a first draft of the present paper. ON THE DYNAMICS OF SUPPLY-CONSTRAINED EQUILIBRIA