Statistical-physics-inspired model for intrinsic fluctuations driving supply and demand in markets

TL;DR

This paper introduces a statistical-physics-inspired model to analyze how intrinsic fluctuations among agents affect supply, demand, and equilibrium prices in markets with conserved goods, highlighting differences from traditional models.

Contribution

It presents a novel model incorporating agent-based fluctuations in goods distribution, contrasting mean-field and Boltzmann-Gibbs approaches to market equilibrium analysis.

Findings

Equilibrium prices differ significantly between mean-field and Boltzmann-Gibbs distributions.

Large fractions of inactive agents impact market prices.

Fluctuations lead to deviations from classical economic predictions.

Abstract

We propose a simple statistical-physics-inspired model for the effect of intrinsic fluctuations on supply and demand in markets. The model consists of agents that trade in two types of goods of which the total number is separately conserved. The relative preference of an individual agent for the two types of goods is determined by a utility that is identical for all agents. Market supply and demand curves are computed and compared for various motivated choices of the distribution of goods over the agents. In particular, we compare the "mean-field" case, in which all agents have the same number of goods and that is akin to the economics textbook case, to the case of Boltzmann-Gibbs distributed goods, in which agents have a fluctuating number of goods. We find that the resulting equilibrium prices are not equal for these two approaches, especially when a large fraction of the agents can neither buy nor sell.