More Than One Commodity: Spot Markets: 0 + 0 0c C C C + 0 0c C C C +
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Naresh SehdevMore Than One Commodity: Spot Markets: 0 + 0 0c C C C + 0 0c C C C +
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Naresh SehdevMore than one commodity: Spot markets
So far we’ve assumed that there is only one commodity at each period and in each state. Now
let’s redefine the model for multiple commodities. Let C denote both the set and the number of
commodities, indexed by c ∈ C.
The presence of multiple commodities at t = 0 (i.e., today) requires nothing that we haven’t
already done: we simply replace the single consumption variable x0 ∈ R+ with the bundle x0 =
(x0c )c∈C ∈ RC C
+ , and add a price-list p0 = (p0c )c∈C ∈ R+ of today’s prices. But the presence of
multiple commodities tomorrow introduces something new: spot markets and spot prices.
With only one commodity, no markets would be open tomorrow — there would be nothing to
trade for that single commodity — so the only economic activity tomorrow would be delivery and
consumption of the single commodity (contingent on which state has occurred). But if more than
one commodity will be available when tomorrow arrives, we should expect that markets for the
commodities will exist and trade will take place. The markets will be spot markets, in which
transactions and delivery will take place “on the spot” — at the spot prices that are current
tomorrow.
Of course, in the Arrow-Debreu contingent claims model these spot markets don’t exist: all trans-
actions take place today, at today’s contingent-claim prices, for delivery tomorrow, contingent
upon which state of the world has occurred. Therefore the elements of the Arrow-Debreu model
with C commodities are:
S×C
Consumption plans: x0 ∈ RC
+ and x1 ∈ R+ .
S×C
Prices: p0 ∈ RC
+ and p1 ∈ R+ .
The consumer’s budget constraint: p0 · x0 + p1 · x1 5 p0 ·x̊0 + p1 ·x̊1 .
If we let l = C + SC, we simply have the standard Walrasian model: l markets, with prices p ∈ Rl+
and consumers’ plans (bundles) x ∈ Rl+ , and with the single budget constraint p · x 5 p ·x̊.
The elements of the Arrow securities-and-spot-markets model are:
S×C
Consumption plans: x0 ∈ RC
+ and x1 ∈ R+ .
Commodity prices today: p0 ∈ RC
+.
Securities: dk ∈ RS , k = 1, . . . , K.
Security prices today: q ∈ RK
+.
Spot prices tomorrow: p ∈ RS×C
+ — i.e., ps ∈ RC
+, ∀s ∈ S.
Security holdings (portfolios): y ∈ RK .
Budget constraint today: p0 · x0 + q · y 5 p0 ·x̊0 .
Budget constraints tomorrow: ps · xs 5 ps ·x̊s + K
P
k=1 dsk yk , ∀s ∈ S.
