Question

wompeuve equilibrium. 3. How the intuition of general equilibrium in a timeless economy should be adapted to consider time and uncertainty? What is a contingent commodity? 4. Present an example of a contingent claim.

Answer 1

3. In economics, General Equilibrium Theory mainly deals with the dynamic market behaviour of demand, supply and price of all the interacting markets of an economy and at the end come to a point where the whole economy achieves a stable equilibrium. In a timeless economy, to consider the idea of time and uncertainty , we should follow Arrow-Debrue model i.e. the central of general equilibrium theory. Under some certain assumptions: which are convex preferences, perfect competitive market and independency of demand , here we got a new general idea about commodity , known as Contingent Commodity which we can recognise on the basis of the time and the place of delivery or availability not on the basis of its quality or uncertainty. As the availability plays a vital role in aggregate supply of the commodity along with its market price, this model stands with a layer of uncertainty on price thus we can get multiple equilibria.  

• Contingent Commodity is the basic of general equilibrium theory introduced by arrow to support his theory of general equilibrium with uncertainty where this kind of commodity is considered on the basis of its availability and consumption and production possibility. For example , Paddy harvesting in India(kharif) mainly in November and december is a contingent commodity cause the amount of paddy grows every year depends upon the average rainfall of the year . Thus actually Contingent Commodity mainly refers to the environmental uncertainty .

4. In Financial Economics , Contingent Claim mainly refers to the derivatives which has some pay out which is independent of any future uncertainty. The most common example of Contingent Claim is - Option , where one party has the right to contract to buy/sell the underlying asset in a fixed price without considering the prevailing market price of the asset.