In order to model the prices of goods within a market we must make a few assumptions that strip away the complexity of a normal market and focuses on the goods represented in the model.

Isolation of Factors

Evenly Rotating Economy

In order to eliminate external influences I have first assumed that this segment exists within an otherwise evenly rotating economy.

The "evenly rotating economy" consists of a market in which all needs get satisfied. In over-simplified terms all supply and demand achieves equilibrium (which, contrary to classical economics never exists in functioning economies).

Isolated Segment of Market

The imaginary market segment that I have created with this model exchanges pairs of shoes and bushels of wheat. The exchange of goods in other segments of the market do not influence these two goods.

Production & Sales

Production Base & Sales Fraction

I have established the following base production and sales percentages from which to make calculations.

	Base Production	Sales %
Shoe Production	50 pairs/mo.	98.00%
Wheat Production	100 bushels/mo.	95.00%

Production & Sales Growth (Decline)

The current production rate equals the base production rate times the fractional increase compounded by the number of months.

The current production rate times the fractional sales rate yields the sales rate of the product at the current time. (e.g. with no change in production, shoe production equals 50 pairs/month times a 98% fractional sales rate yields sales of 49 pairs/month at each current time throughout the 60 month period.)

Money

The following assumptions regulate the quantity and initial distribution of money:

Monetary Base

The money supply begins with 10,000 dollars of money.

 

Initial Distribution of Money

The shoe and wheat producers share the initial quantity of money 50/50.

Fixed Quantity of Money - Simulation 1

The money supply remains unchanged (at 10,000 dollars) throughout the 60 months.

Inflation: Increasing Quantity of Money - Simulation 2

The money supply increases steadily during the inflation/deflation period. (See below.)

Deflation: Decreasing Quantity of Money - Simulation 3

The money supply decreases steadily during the inflation/deflation period. (See below.)

Inflation/Deflation Period

The expansion (or contraction) of the money supply begins in the month determined by the value set for increase start and lasts for a period determined by the value set for increase duration.

100 % Exchange

In the model the market clears itself.

Direct Exchange

All wheat production offered for sale gets exchanged for all shoe production offered for sale. Because this model tracks production, not producers, the number of producers does not matter.

Indirect Exchange (Money)

Because of the evenly rotating economy and the 100% exchange assumption, this market does not require a form of indirect exchange. I have, however, assumed the use of indirect exchange (use of money) to demonstrate the relationship to and influence by changes in the quantity of money.

At each point in time the sellers of shoes and the sellers of wheat each have half the available money. In other words each groups exchanges all their money for the goods of the other group. This makes the direct exchange and money exchanges consistent.

Prices

The following prices—direct and indirect—result of the market clearing itself:

Direct Exchange

Based on the assumption of full exchange (all of one product for all of another) the model calculates an exchange ratio (or price.) e.g. an exchange of 60 pairs of shoes for 120 bushels of wheat results in a wheat price of 0.5 pair/bushel or a shoe price of 2 bushels/pair.

Indirect Exchange (Money)

Based on the 100% exchange assumption the dollar prices for any period equals a ratio of one half the quantity of money to the quantity of a specific good, e.g. With a total quantity of money of $10,000 an exchange of $5,000 for 50 pairs of shoes results in a money price of $100/pair.

Definitions

Inflation:

an increase in the quantity of money.

Deflation:

a decrease in the quantity of money.

This tab provides more detail of the elements of this model:

Commodities

This model contains three commodities: Shoes, Wheat, and Money. It shows the flow of shoes and wheat from production through sale. The quantities of these two commodities that do not get sold accumulate in their respective inventories. The flow of money either increases or decreases the quantity of money in stock. The following outline briefly describes the representation of these commodities:

Shoes

Shoe Production

Shoes get produced at a rate of a number of pairs per month based on the following two variables:

base shoe production (Fixed)

This variable provides the base rate of shoe production.

annual fractional shoe increases (Adjustable)

This variable provides the annualized fractional rate by which shoe production increases. - Plus or minus 20%es beginning with the base rate.

Shoe Sales

Shoe sales amount to a fraction of the shoe production based on the following variable:

fractional shoe sales rate (Fixed)

The fraction of shoe production sold each month.

Shoes (Inventories)

The stock of shoes accumulates based on the production rate less the sales rate.

Wheat

Wheat Production

Wheat gets produced at a rate of a number of bushels per month based on the following two variables:

base wheat production (Fixed)

This variable provides the base rate of wheat production.

annual fractional wheat increases (Adjustable)

This variable provides the annualized fractional rate by which wheat production increases beginning with the base rate.

Wheat Sales

Wheat sales amount to a fraction of the wheat production based on the following variable:

fractional wheat sales rate (Fixed)

The fraction of wheat production sold each month.

Wheat (Inventories)

The stock of wheat accumulates based on the production rate less the sales rate.

Money

Increase rate

This flow increases the quantity of money at a rate of a number of dollars per month determined by the following variables:

annual fractional money increase rate (Adjustable)

The annualized fractional rate at which the quantity of money increase (or decreases). - Plus or minus 15%

Increase Start (Fixed for these simulations)

The quantity of money does not begin to increase (or decrease) until this month.

Increase Duration (Fixed for these simulations)

The number of months during which the quantity of money increases (or decreases).

Money Stock

Beginning with 10,000 dollars the quantity of money increases (or decreases) each month depending on the increase rate described above.

Prices

The model calculated the prices for shoes and wheat in terms of direct and indirect (money) exchange. It makes these calculations based on the assumptions reiterated below:

Direct Exchange Prices

Shoes - Bushels/Pair

Total wheat sales divided by total shoe sales, given the assumption of a 100% exchange. This calculation gives the number of bushels of wheat exchanged for each pair of shoes.

Wheat - Pairs/Bushel

Total shoe sales divided by total wheat sales, given the assumption of a 100% exchange. This calculation gives the number of pairs of shoes exchanged for each bushel of wheat .

Money Prices

Shoes - Dollars/Pair

The number of dollars exchanged for each pair of shoes, given the assumption that half the money stock gets exchanged for all the shoes sold.

Wheat - Dollars/Bushel

The number of dollars exchanged for each bushel of wheat, given the assumption that half the money stock gets exchanged for all the wheat sold.

Note: Each of the three scenarios in this presentation use the same embedded model. Since the model reloads when you open a new page, you will need to reset the adjustable variables.

When you click the "Run Simulation" button, you will see the following behavior-over-time charts:

Sales

Sales rates vary based on fractional sales rates and production rates.

Inventories

Because producers do not sell all production, inventories of shoes and wheat increase over time.

Direct Exchange Prices

This chart reflects the exchange rate from two perspectives - i.e. wheat price: pairs/bushel and shoe price: bushels/pair. (The wheat price indicates how many pairs of shoes it takes to buy a bushel of wheat. The shoe price indicates how many bushels of wheat it takes to buy a pair of shoes.)

Money Supply

Same criteria as direct exchange using money

Dollar Prices

The dollar price of shoes based on shoe sales and transaction parameters. The dollar price of wheat based on shoe sales and transaction parameters.

Price Conversion

Converts the dollar price of shoes to a wheat price for shoes, and converts the dollar price of wheat to a shoe price for wheat. Done for the curious to assure the calculations reconcile.