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The Concept of Stable Equilibrium

   

Added on  2020-03-28

9 Pages1613 Words81 Views
Running head: THE CONCEPT OF STABLE EQUILIBRIUM 1The Concept of Stable EquilibriumStudent’s (Name)Institution
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THE CONCEPT OF STABLE EQUILIBRIUM 2The concept of stable equilibrium A stable economic equilibrium exists if an economy is able to gravitate back toequilibrium after a shock. The concept of a stable equilibrium economy can be explained throughthe analogy of a marble resting at the bottom of a bowl as in the diagram labeled (a) in figure onebelow. In any case the marble is nudged a bit up any side of the bowl, the marble will alwaysreturn to the normal position where it was resting at the bottom of the bowl (Tieben, 2012). Astable equilibrium can also be explained though the concept of market equilibrium. The diagrambelow illustrates the concept of stable equilibrium.The diagram indicated asfigure two aboveillustrates the concept ofstableequilibriumeconomy in relation to astable market equilibrium(University of Adelaide& Flinders University,
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THE CONCEPT OF STABLE EQUILIBRIUM 32012). The figure indicates marks as DD which represents a negatively sloped demand curve aswell as the line marked SS representing a positively sloped supply curve. The intersection pointmarked E indicates the point of equilibrium. The price OP and the price OQ determines theequilibrium (Schwödiauer, 2011). The stable economic equilibrium can also be seen the mannerof the market equilibrium, where in any case the economy is affected by any external force, theeconomy is able to settle back to its normal stability. If any prices are set to the economic system above the equilibrium price which in thediagram is marked as OP1also known as the marked price, a downward pressure is created to theequilibrium back to its initial point. At the marked price in the diagram, P1B is the quantitysupplied to the market while the quantity demanded is only at P1A. In such cases the equilibriumhas been shocked where the quantity demanded is higher than the quantity demanded. Thesurplus therefore exists in the market to the extent of point AB (Schwödiauer, 2011). In this casea downward pressure is created in the price. The downward pressure created acts applies on theprices up to the equilibrium point where the quantity demanded equals the quantity supplied. This applies to various markets within an economy such as labor market where minimumwage bill is used to maintain the market at equilibrium. The same applies to the prices below theequilibrium prices. In respect to the diagram, by taking the price OP2, at this price the quantity ofproducts available in the market is below the quantity in demand (Ralf, 2010). As a result of theexcess demand in the equilibrium market, an opposite pressure is created to push the priceupwards to the point of equilibrium where the quantity demanded equals the quantity supplied.The same situation applies to a stable economic equilibrium where the government sets outvarious policy to maintain the economy to an equilibrium point. In consideration of the market
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