Stable and unstable equilibrium, Managerial Economics

Assignment Help:

Stable and Unstable Equilibrium

An equilibrium is said to be stable equilibrium when economic forces tend to push the market towards it.  In other words, any divergence from the equilibrium position sets up forces, which tend to restore the equilibrium.  This is the case in the market for good X illustrated.

At prices above Ope, there is an excess supply which pushes the price down.  At prices below Ope there is an excess demand which pushes the price up.

Unstable equilibrium on the other hand is one such that any divergence from the equilibrium sets up forces which push the price further away from the equilibrium price.  Consider the figure below which illustrates the market for good Y, which has a demand curve sloping upwards from left to right.  Good Y might be an inferior good or a veblen good.

Price Ope is the equilibrium price and quantity Oqe is the equilibrium quantity.  The "abnormal" demand curve means that at prices above Ope there is excess demand which pushes the price upwards and away from the equilibrium.  Similarly, at prices below Ope, there is excess supply which pushes the prices even further down.

Thus, although equilibrium are states of rest at which no economic forces exist to change the situation, it is important to remember that not all equilibria are stable.  The equilibrium in the figure above is sometimes called a knife edge equilibrium because a small change in price sends the system well away from equilibrium.


Related Discussions:- Stable and unstable equilibrium

Managerial economics, present a detailed discussion of the principles of ma...

present a detailed discussion of the principles of managerial economics

Arguments for uneven distribution of income and wealth, Arguments for Uneve...

Arguments for Uneven Distribution of Income and Wealth The basic economic argument to justify large income inequality was the assumption that high personal and corporate income

What is cross price easticity of demand, For some time, two firms have char...

For some time, two firms have charged $0.90 per standard unit of crating materials for shipping a particular type of machine tool and each has been selling about 20,000 units per m

Public sector borrowing requirement (psbr), PUBLIC SECTOR BORROWING REQUIRE...

PUBLIC SECTOR BORROWING REQUIREMENT (PSBR) Public Sector Borrowing Requirement (PSBR) is the amount which the government needs to borrow in any one year to finance an excess e

What is a retention bonus, A Retention bonus is an incentive paid to a key ...

A Retention bonus is an incentive paid to a key employee to retain them by a critical business cycle. This could be a transitional period (like mergers and acquisitions) to ensure

What is lerner’s index, Antitrust authorities at the Federal Trade Commissi...

Antitrust authorities at the Federal Trade Commission are reviewing your company's recent merger with a rival firm. The FTC is concerned that the merger of two rival firms in the s

What do you mean by cost function, Q. What do you mean by Cost Function? ...

Q. What do you mean by Cost Function? Cost function is a derived function. It's derived from the production function that describes the efficient method of production at any gi

Determinants of consumption function, Other Determinants 1.          R...

Other Determinants 1.          Rate of Interest Is contained in the argument of the classified economists who argued that rational consumers will save more and consume les

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd