Economics Assignment on Equilibrium
Added on 2020-04-01
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Running head: ECONOMICS ASSIGNMENT Economics AssignmentName of the StudentName of the UniversityAuthor Note
1ECONOMICS ASSIGNMENT Introduction: The term equilibrium, in economic context, is defined to be the condition where thedemand and the supply forces interact with each other and reach to a mutually agreed balancedsituation, from where neither the demand forces nor the supply forces have any incentive todeviate from, provided there is no external influence from any exogenous conditions. Thedemand and the supply forces are the backbone of the market dynamics and all the activities inthe market are subjected to the mutual interactions of these two forces (Ekelund Jr & Hébert,2013). The equilibrium, as defined above, is said to be a stable equilibrium, if in case of anydeviation from the equilibrium condition due to influence of exogenous forces, the economyagain comes back to its original equilibrium situation in due course of time. The report takes intoaccount this concept of stability of equilibrium, both in terms of microeconomic andmacroeconomic perspectives. In this context, the report tries to analyze the current stabilityscenario in the economy of Australia, with respect to economic indicators like GDP, price levelsand others (Baumol & Blinder, 2015). Stability of equilibrium: In the market economy, the consumer and the producer behaviors are determined by thedemand and the supply side dynamics respectively. The dynamics in the market can be shown asfollows:
2ECONOMICS ASSIGNMENT Figure 1: Microeconomic Stability in equilibrium(Source: As created by the author)The above figure shows the dynamics of the demand and the supply curve. As can beseen from the diagram, the equilibrium occurs at the point where the supply curve and the supplycurve touches each other; point E in this case. The equilibrium price is at point P0 and theequilibrium quantity demanded and the equilibrium quantity supplied both being Q0. Thestability of the equilibrium, can be seen with the help of the following phenomenon (Fisher,2016). In the above diagram, when due to some reasons, the price increases from the equilibriumprice P0 to P1, then the demand for the commodity decreases significantly. This fall in demandmay be a cumulative effect of two events. Due to an increase in the level of price, firstly, the
3ECONOMICS ASSIGNMENT existing buyers of the same commodity buy less than the previous amount. Secondly, themarginal buyers, in the initial condition, now completely moves out of the market as thecommodity now becomes unaffordable to them (Boland, 2014). Together these two effectsdecrease the overall demand in the market. However, due to an increase in the price, the marketbecomes more attractive to the sellers, more and more sellers try to enter the market, and theexisting sellers increase their production, thereby increasing the supply in the market. Togetherthis leads to an excess supply in the economy, which in its turn creates a downward pressure onthe price levels as the sellers are required to lower their price levels. Thus, the price level comesback to its initial equilibrium point P0 (MacDonald & Stein, 2012). Again, if the reverse scenario takes place and the price decrease from the equilibriumlevel P0 to P2, then the supply decreases, as due to loss of profitability in the market, manysellers move out of the market. On the other hand, the decrease in the price increases the demandfor the same commodity, by the law of demand. This in turn creates an excess demand in themarket, leading to an upward pressure on the price levels such that the price again comes back toits equilibrium level P0. Thus, it can be seen that no matter however the price level changes from the equilibriumsituation, the demand and the supply forces interact with each other to bring it back to its initialequilibrium situation, thereby indicating that the concerned equilibrium is a stable one(Henderson, 2014). The above scenario is based on the microeconomic perspective as it deals with thedynamic stability of the equilibrium in one particular market. The same concept, however, isapplicable in the macroeconomic perspective too:
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