New Essentials of Economic Theory I. Assumptions, Economic Space and Variables

Olkhov, Victor (2019): New Essentials of Economic Theory I. Assumptions, Economic Space and Variables.

Abstract

This paper develops economic theory framework free from assumptions on market equilibrium, utility functions, rational expectations and etc. We describe macroeconomics as system of economic agents under action of n risks. Economic and financial variables of agents, their expectations and transactions between agents define macroeconomic variables. Agents variables depend on transactions between agents and transactions are performed under agents expectations. Agents expectations are formed by economic variables, transactions, expectations of other agents, by all factors that impact macroeconomic evolution. We describe evolution of macroeconomic variables, transactions and expectations by systems of economic partial differential equations. We develop asset pricing model as a result of equations on transactions and expectations and derive equations that describe price dynamics. To do this we use risk ratings of economic agents as their coordinates on economic space. We approximate description of economic and financial variables, transactions and expectations of numerous separate agents by description of variables, transactions and expectations as density functions on economic space. We take into account flows of economic variables, transactions and expectations induced by motion of separate agents on economic space due to change of agents risk ratings and describe macroeconomic impact of these economic flows. We apply our model to description of business cycles, describe models of wave propagation for disturbances of economic variables and transactions, model asset price fluctuations and argue hidden complexities of classical Black-Scholes-Merton option pricing.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic Theory, Risk Ratings, Economic Space, Economic Flows, Density Functions
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; G - Financial Economics > G0 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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