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

Question, Q.2. On the basis of the analysis of the case above, what is your...

Q.2. On the basis of the analysis of the case above, what is your opinion about legalizing marijuana in Canada ?mum 100 words accepted#

Discounting principle, Using the discounting principle calculate the presen...

Using the discounting principle calculate the present value of an annuity of five years at Rs. 500 payments made at the end of each of the next five years at 10% interest. stion..

Demand for money, Demand for money   The demand for money is a more d...

Demand for money   The demand for money is a more difficult concept than the demand for goods and services.  It refers to the desire to hold one's assets as money rather tha

Using total expenditure for calculating national income, Using Total Expend...

Using Total Expenditure for Calculating National Income The expenditure approach centres on the components of final demand which generate production.  It thus measures GDP

Derevatives ., how to solve problems using derivatives ?

how to solve problems using derivatives ?

Dominant strategy, In a one-shot game, if you advertise and your rival adve...

In a one-shot game, if you advertise and your rival advertises, you will each earn RM5 million in profits.  If neither of you advertises, your rival will make RM4 million and you w

Advantages of product differentiation, Advantages of Product Differentiatio...

Advantages of Product Differentiation We can distinguish between those advantages for the firm itself and those for the consumer: a.          For the firm. i.

Monopolist advertise, A  monopolist has two types of customers. There are 1...

A  monopolist has two types of customers. There are 100 of Type A, who will every pay up to $10 for a single unit of the good, and 50 of Type B, who will every pay up to $8. Neithe

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