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Modelling economic hysteresis losses caused by sunk adjustment costs

Author

Listed:
  • Jolita Adamonis
  • Matthias Göcke
Abstract
Transition from one economic equilibrium to another as a consequence of shocks is often associated with sunk adjustment costs. Firm-specific sunk market entry investments (or sunk market exit costs) in case of a reaction to price shocks are an example. These adjustment costs lead to a dynamic supply pattern similar to hysteresis. In analogy to “hysteresis losses” in ferromagnetism, the authors explicitly model dynamic adjustment losses in the course of market entry and exit cycles. They start from the micro level of a single firm and use explicit aggregation tools from hysteresis theory in mathematics and physics to calculate dynamic losses. The authors show that strong market fluctuations generate disproportionately large hysteresis losses for producers. This could give a reason for the implementation of stabilizing measures and policies to prevent strong (price) variations or, alternatively, to reduce the sunk entry and exit costs.

Suggested Citation

  • Jolita Adamonis & Matthias Göcke, 2019. "Modelling economic hysteresis losses caused by sunk adjustment costs," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(2), pages 299-318, April.
    • Handle: RePEc:mes:postke:v:42:y:2019:i:2:p:299-318
    DOI: 10.1080/01603477.2017.1401902
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    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D69 - Microeconomics - - Welfare Economics - - - Other

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