Wednesday, July 16, 2014

Adiabatic price changes in economics

This is a repricing that is slow enough that all prices change within their uncertainty band without changing their relative entropy relationship.
From Chris House's blog, and you can see the volatility between core inflation and all goods inflation just before the crash. All goods includes oil import prices, but cor inflation are those consumer items known to have stable prices. We can see that the price setting process of the economy was too fast to incorporate the oil shortages. Hence oil deliveries were out of sequence, meaning their entropy changes faster than core inflation. This was not an adiabatic process, so producers dropped out and we crashed. Mathematicians should look this up, derive the adiabatic rate of change from the entropy equations and use that as the basis for an economic model.

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