Stable and unstable equilibrium, Managerial Economics

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.

Posted Date: 11/27/2012 6:12:38 AM | Location : United States







Related Discussions:- Stable and unstable equilibrium, Assignment Help, Ask Question on Stable and unstable equilibrium, Get Answer, Expert's Help, Stable and unstable equilibrium Discussions

Write discussion on Stable and unstable equilibrium
Your posts are moderated
Related Questions

State about Managerial economics Managerial economics is a discipline which is designed to facilitate a solid foundation of economic understanding for business managers and al

The city of Cabernet is very popular for its production of wine. The inhabitants of the city have an aggregate demand for wine that can be described as follows: where Q d

Using Factor Incomes for Calculating National Income     A second method is to sum up all the incomes to individuals in the form of wages, rents, interests and profits t

Let Consider the following (familiar) equation which estimates the number of hours of sleep / year  that someone gets as a function of hours worked / year (total work), education (

Real Vs Nominal GNP: "Deflating" by a price Index   One of the problems that confront economists when measuring GNP is that they have to use money as the measuring rod.  Thes

Explain how a product would reach equilibrium position with the help  of -iso-quants and iso-cost curve.

critically analysis the profit maximisation theory of business firm and illucidet the role of profit in business

SIGNIFICANCE  OF  THE  CONCEPT  AND THEORY OF SEARCH UNEMPLOYMENT   From what has been  said earlier, you understand the significance of the theory of search  unemployment  as

if Q=120-2p is the equation for demand curve, find the compounding total, marginal and average revenue function