Applications of a constrained mechanics methodology in economics

ISSN： 0143-0807

Source： European Journal of Physics, Vol.32, Iss.6, 2011-11, pp. : 1443-1463

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Abstract

This paper presents instructive interdisciplinary applications of constrained mechanics calculus in economics on a level appropriate for undergraduate physics education. The aim of the paper is (i) to meet the demand for illustrative examples suitable for presenting the background of the highly expanding research field of econophysics even at the undergraduate level and (ii) to enable the students to gain a deeper understanding of the principles and methods routinely used in mechanics by looking at the well-known methodology from the different perspective of economics. Two constrained dynamic economic problems are presented using the economic terminology in an intuitive way. First, the Phillips model of the business cycle is presented as a system of forced oscillations and the general problem of two interacting economies is solved by the nonholonomic dynamics approach. Second, the Cass–Koopmans–Ramsey model of economical growth is solved as a variational problem with a velocity-dependent constraint using the vakonomic approach. The specifics of the solution interpretation in economics compared to mechanics is discussed in detail, a discussion of the nonholonomic and vakonomic approaches to constrained problems in mechanics and economics is provided and an economic interpretation of the Lagrange multipliers (possibly surprising for the students of physics) is carefully explained. This paper can be used by the undergraduate students of physics interested in interdisciplinary physics applications to gain an understanding of the current scientific approach to economics based on a physical background, or by university teachers as an attractive supplement to classical mechanics lessons.