Economics Assignment on Stable Equilibrium
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Added on 2020-04-07
Economics Assignment on Stable Equilibrium
Added on 2020-04-07
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Running head: STABLE EQUILIBRIUMStable EquilibriumName of the StudentName of the UniversityAuthor note
1STABLE EQUILIBRIUMTable of ContentsIntroduction......................................................................................................................................2Economic definition of stable equilibrium......................................................................................2Government Intervention in market.................................................................................................3Macroeconomic Environment and Stability....................................................................................4Australian economy.........................................................................................................................5GDP in Australia..........................................................................................................................5Price level....................................................................................................................................6Unemployment............................................................................................................................8Conclusion.......................................................................................................................................9References......................................................................................................................................10
2STABLE EQUILIBRIUMIntroduction Economic stability is utmost important for achieving a stable growth rate and a steadypath of development. The term stable equilibrium formally refers to a state where any changefrom that state will automatically brings back that state. There are no needs for external forces toensure the stability. In microeconomics, demand and supply forces restore the equilibrium.Aggregate demand and aggregate supply are forces work for the overall economy and determinethe state of the economy. The concern of this paper is analysis the state of stability for Australianeconomy. Different indicators like GDP, unemployment, inflation level are considered foranalyzing the current state of Australian economy. Economic definition of stable equilibriumWhen microeconomics is considered, then demand and supply situation of a particularmarket is considered. The equilibrium is determined where demand and supply curve match at apoint. The point of equilibrium is stable if any deviation from the point restores the pointwithout intervention of any external forces. In the absence of any distortion in the market, therational agents take decisions in such a way that will bring equilibrium (Anufriev et al, 2013).The situation is described in the following figure.
3STABLE EQUILIBRIUMFigure 1: Demand, Supply and Stability (Source: As created by Author)Price and quantity determined by the initial equilibrium are P* and Q* respectively. Thisobtained from the intersection of the demand curve (DD) and supply curve (SS). E is theequilibrium point. If price is P1, that is above the equilibrium price then rational consumer willdemand less and suppliers will supply more leading to an excess supply in the market. Price willdecrease to the level of P* for balancing demand and supply. Consider a situation where price isless than the equilibrium price. Suppose price is at P2. At this price, suppliers will supply lessbecause of low revenue prospect and buyers will demand more because of a low price.Consequently, there will be excess demand in the market. Price needs to be adjusted to the levelof equilibrium for a balance of supply and demand. When this happens naturally in the marketthen E is said as a stable equilibrium. Government Intervention in marketStability is not always maintained in the market. Price often fails to made true costbenefit analysis in the market. Hence, the price mechanism does not work efficiently. In thepresence of externality, market produces outcome that is either greater or less than the optimum
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