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

What do you mean by ordinal utility, Q. What do you mean by Ordinal utility...

Q. What do you mean by Ordinal utility? A method of analysing utility or satisfaction derived from consumption of services andgoods, based on a relative ranking of services and

Objectives of demand forecast, Drafting of Production Policy: Demand forec...

Drafting of Production Policy: Demand forecasts assists in drafting appropriate production policy so that there may not be any space between future demand and supply of a product.

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

Quality controls - importance of demand forecast, Quality and Quantity Cont...

Quality and Quantity Controls: Demand forecasting is a necessary and valuable instrument in the control of management of an organisation to provide finished goods of correct quant

Discuss quantity demanded and supplied , Supply and Demand Discuss and...

Supply and Demand Discuss and analyze following statement: The Wall Street Journal reported that recent law school graduates were having a very difficult time obtaining jo

Effects of delegating monetary policy, Question: (a) Under what condit...

Question: (a) Under what conditions would a central bank be considered independent. (b) Discuss the effects of delegating monetary policy making to an independent agent on

Early theories about wage determination, Theories of wage determination ...

Theories of wage determination Early theories about wages The earliest theories about wage determination were those put forward by Thomas Malthus, David Ricardo and Karl

Neo-classical view, The neo-classical view The neo-classical view is t...

The neo-classical view The neo-classical view is that market forces are the best directors of the economy.  Positive attempts by the government it is argued inevitably make th

Define the pragmatic managerial economics, Pragmatic Managerial economics ...

Pragmatic Managerial economics  Managerial economics is pragmatic. In pure micro-economic theory, analysis is performed, based on certain exceptions, which are far from reality

Factors influencing exchange rates, Factors influencing Exchange Rates ...

Factors influencing Exchange Rates i.  Inflation:   Other things being equal, a country experiencing a high rate of inflation will experience a lower demand for its goods whil

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