Stable Equilibrium and Stabilization Instruments in Business Economics

The assignment content discusses the concept of stable economic equilibrium and its application to Australia's economy. It defines microeconomic stability as a state where market demand and supply curves match each other, and macroeconomic stability as a state where aggregate demand and aggregate supply determine GDP and price level. The report analyzes the current stability for Australian economy, examining indicators such as GDP and inflation rate. It also discusses the two main stabilization instruments used by the government to restore stability, namely automatic stabilizers and discretionary stabilizers.

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Author note

1BUSINESS ECONOMICS
Table of Contents
Introduction......................................................................................................................................2
Economic stability...........................................................................................................................2
Stability for Australian Economy....................................................................................................4
GDP.............................................................................................................................................5
Price Level...................................................................................................................................6
Instrument used for stabilization.....................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................9

2BUSINESS ECONOMICS
Introduction
Free market equilibrium is obtained where market demand and market supply condition
matches with each other. The equilibrium is said to be a stable equilibrium if any changes from
equilibrium condition automatically restores equilibrium. Without any external forces demand
and supply, forces adjust to bring equilibrium in the market. The paper explains a stable
equilibrium using simple tools of demand and supply. The implication of stabilization for a
single market as well as that for the whole economy is considered. Australia is a capitalist
economy, relying largely on market economy. The economy manages to maintain a stable state.
However, government intervenes to ensure stability if necessary.
Economic stability
Figure 1: Stability in Equilibrium
(Source: As created by the Author)

3BUSINESS ECONOMICS
The demand and supply curve explain the behavior of buyers and sellers in the market
(Cournède, Garda & Ziemann, 2015). The equilibrium and its stability is defined in figure 1. In
the above figure, the demand curve is reflected as DD and SS curve reflects the market supply
curve. The initial equilibrium is obtained at the point where demand and supply curve meets at a
point. Such a point is E in figure 1. Corresponding to the equilibrium point, P* is the equilibrium
price and Q* is the equilibrium quantity. Now, if any movement from the equilibrium position
brings back equilibrium automatically then the equilibrium point E is said to be a stable
equilibrium.
Suppose, price increases from P* to P1. As per law of demand, an increase in price lead to
a decrease in quantity demanded. Demand decreases for two reasons. The existing buyers restrict
their demand. For those standing at the margin, an increase in price makes the goods
unaffordable for them and they leave the market. This creates an excess supply situation in the
market. To sell out the excess supply sellers need to consider a downward revision in price.
Therefore, price again comes to P*. Suppose now, price falls below P*. Because of lower price
buyers now, increase their demand. On the other hand, low profitability discourages producers
and they reduce supply in the market (Garda & Ziemann, 2014). Again, there will be a mismatch
between supply and demand causing excess demand in the market. To balance the demand with
available supply price should be increased. The adjustment continues until price reaches to its
equilibrium level. This explains stability in a free market.
Now, for the economy as a whole what matters s the macroeconomic stability explained
by the aggregate demand-aggregate supply analysis.

4BUSINESS ECONOMICS
Figure 2: Macroeconomic Stability
(Source: As created by the Author)
Macroeconomic Stability depends on stability of different macroeconomic indicators.
Aggregate demand and aggregate supply determines GDP and price level of the economy
(Fontana & Setterfield, 2016). The economy is said to stable if there are stability in income and
price level.
Stability for Australian Economy
Australian economy is characterized as a market capitalist economy. The economic
system and hence, major economic decisions are taken through market operation rather than
centralized economic planning. Price fluctuations in domestic and overseas market give price
signals to resource owners based on which they satisfy people’s need and do profit maximization
(Behlul et al., 2017). For example, prices in the share or stock market help to make investment
decision. The overall stability is for Australian economy is analyzed by examining indicators
such as GDP, price level.

5BUSINESS ECONOMICS
GDP
Figure 3: GDP of Australian Economy
(Source: tradingeconomics.com)
Over the last five or six years, Australia records a stable movement in the GDP.
However, GDP fluctuates by going up or down but there were no drastic change in the GDP. In
2006, GDP was 853.76 billion in USD. In 2016, it has become 1204.62 USD Billion
(tradingeconomics.com, 2017). The highest GDP recorded in 2013. Then GDP gradually
declines but no dramatic change is recorded yet.

6BUSINESS ECONOMICS
Price Level
Figure 4: Inflation in Australia
(Source: tradingeconomics.com)
Price level of an economy is indicated by the inflation rate. Like, GDP inflation rate in
Australia is also stable and has a more or less declining trend (Robinson, Nguyen & Wang,
2017).
Instrument used for stabilization
In times of business cycle shocks, the Australian government to restore stability uses
different stabilization policies. The two main stabilizing instruments here is
 Automatic Stabilizer
 Discretionary Stabilizer

7BUSINESS ECONOMICS
Automatic Stabilizer
Automatic stabilization is stabilization mechanism designed through government tax or
other expenses. The automatic stabilizers are so called because it affects aggregate demand in a
countercyclical way without directly influencing federal treasures or other Fed policies. The
government budget automatically adjusts and switch from a deficit to surplus depending on
whether the economy is in the phase of economic boom or slowdown (Belinga et al., 2014).
Different tax receipts such as PAYG tax, CGT, GST, company tax or exercise are major
instruments used under automatic stabilizer.
Discretionary Stabilizer
Discretionary Stabilizers are also known as structural stabilizer. Discretionary stabilizer
needs some significant changes in government budget. This includes introduction of a new type
of tax, alteration of existing exercise tax, increasing or decreasing government expenditure in
areas like education, defense or infrastructure (Martorano, 2015). This influences aggregate
demand and hence, affects economic health. Discretionary stabilizers are used in times of severe
recession or economic boom when automatic stabilizers fail to bring complete stability for the
economy.
Conclusion
The report evaluates the idea of stable economic equilibrium. Stable equilibrium is
defined as a stable position such that displacement of that position restores its original state
without external forces. In this context, both microeconomic and macroeconomic stability is
explained. Microeconomic stability considers stability from a single market perspective whereas
macroeconomic stability considers the economy as a whole. With regard to this, current stability

8BUSINESS ECONOMICS
for Australian economy is analyzed. Australia mostly relies on a free market capitalist economic
system. National income indicated by the GDP and price level is more or less in a stable
position. However, in different phase of business cycle economic stability may be tumbled. Then
government intervenes through different stabilization instrument. The two main stabilizing
instruments used are automatic stabilizer and discretionary stabilizer.

9BUSINESS ECONOMICS
References
Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News.
(2017). Tradingeconomics.com. Retrieved 13 September 2017, from
https://tradingeconomics.com/australia/gdp
Behlul, T., Panagiotelis, A., Athanasopoulos, G., Hyndman, R. J., & Vahid, F. (2017). The
Australian Macro Database: An online resource for macroeconomic research in
Australia.
Belinga, V., Benedek, M. D., De Mooij, R. A., & Norregaard, M. J. (2014). Tax buoyancy in
OECD countries (No. 14-110). International Monetary Fund.
Cournède, B., Garda, P., & Ziemann, V. (2015). Effects of Economic Policies on Microeconomic
Stability.
Fontana, G., & Setterfield, M. (Eds.). (2016). Macroeconomic Theory and Macroeconomic
Pedagogy. Springer.
Garda, P., & Ziemann, V. (2014). Economic Policies and Microeconomic Stability.
Martorano, B. (2015). Lessons from the recent economic crisis: the Australian household
stimulus package. International Review of Applied Economics, 29(3), 309-327..
Robinson, T., Nguyen, V. H., & Wang, J. (2017). The Australian Economy in 2016–17: Looking
Beyond the Apartment Construction Boom. Australian Economic Review, 50(1), 5-20.