Question

When we talk about a "dynamic model" in economic applications, what is the key feature of such a model, in contrast with a "static model"? Why is the difference particularly relevant in natural resource economics applications? How is the concept of allocative "efficiency" different in dynamic as opposed to static contexts? Explain.

Answer 1

Static models

Models which either indicate a process at a specific point of time or which collate a process at various points of time are called static model. It helps to state the form of an object prevailing in a problem statement. This does not vary with time. It stays in equilibrium.

Dynamic models

Models intended to indicate the interactions of an object during the operational period. It is based on time element.

When we talk about a "dynamic model" in economic applications, what is the key feature of such a model, in contrast with a "static model"?

The distinct feature of dynamic model when compare with static model is that dynamic model keep an internal memory of a combination of certain inputs, variables and outputs. Static model is constant and it won't include inputs, variables and outputs.

Why is the difference particularly relevant in natural resource economics applications?

Natural resource economics rely on dynamic model and gave importance to interdisciplinary emphasis. It may have technological constraints and based on solving issues regarding management of resources. It makes solutions based on quantitative analysis. Natural resource economics is the study of resources based on prevention of resource depletion. It is mainly achieved through applying tax on environment.

Dynamic model is used in the applications of natural resource application because the inputs used in these natural resources are also exhaustible. Hence, for confirming the sustainability of economy, several restrictions have been applied in the case of these inputs also. Dynamic model considers inputs, variables and outputs. Petrol is non-renewable, when it has been used abnormally, it will be depleted. Hence, a model which considers and give emphasis to the inputs and outputs are specifically needed in the case of natural resource economics.

There are two type of dynamic models used in the economics of natural resource. They are state dynamics variable and control dynamics variable. State variable deals with state of a system that transmit from initial point to terminal point in a correct way. Control dynamics deals with the transmission from initial point to terminal point in a correct way. The difference between both of these variables is that storage of the resource will be considered in state variable whereas usage of the resource by the human beings is considered in the control variables.

How is the concept of allocative "efficiency" different in dynamic as opposed to static contexts?

Allocative efficiency means the products and services will be distributed as per the preference of consumers. Dynamic allocative efficiency will happen when time passes. It is a time-dependent efficiency where the innovative technologies reduces the cost of production, that means the cost of inputs and other variables. In contrast, static allocative efficiency means the specific efficiency present at a particular point, ie; when the price and marginal cost becomes equal.