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
Price Elasticity of Demand and the slope of the Demand Curve Elasticity determines the shape of the demand curve. From the formulas

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

Cost of Unemployment Unemployment is a problem because it imposes costs on society and the individual.  The cost of unemployment to a nation can be categorized under three hea

Cross Elasticity Cross elasticity of demand measures the degree of responsiveness of the quantity demanded of one good (B) to changes in the price of another good (A).  It is

Factors influencing Supply Curve State of technology     There is a direct relationship between supply and technology.  Improved technology results in more supply as with

Using the CPS data, set the sample to women only and regress lnwage on education & MARRIED (which is 1 if married and 0 if not) and 1-MARRIED. Give a 95 percent confidence interval

Statistical technique used to estimate economic variable Some statistical techniques are used to estimate economic variables of interest to a manager. In a number of cases, sta

Q. Explain about Cardinal utility? A measure of utility or satisfaction derived from consumption of services and goods which can be measured using an absolute scale. Cardinal u

What are the Methods of Managerial Economics The process of managerial economics deals with aspects of economics and tools of analysis, which are employed by business enterpri

Use the data set cd costs2010 to estimate the marginal cost of one more CD. (Regress costs on the number of CDS.) Test the hypothesis that the marginal cost equals 75 cents. How wo