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Essay on Aspects of Stable Economic Equilibrium

   

Added on  2020-04-07

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Running head: STABLE ECONOMIC EQUILIBRIUMStable Economic EquilibriumName of the Student:Name of the University:Author note:
Essay on Aspects of Stable Economic Equilibrium_1
1STABLE ECONOMIC EQUILIBRIUMIntroductionEquilibrium is a very important concept in economics. The stability and efficiency of aneconomic system depends on equilibrium. The functioning of price and market mechanismdetermines the unique combination for equilibrium of the system. The interplay of the forces ofdemand and supply under price mechanism determine the prices of commodities and services atwhich goods and services would be bought and sold. When market mechanism of an economyperforms efficiently, a stable equilibrium can be achieved by a country[ CITATION Hat13 \l1033 ]. The following essay focuses on various aspects of a stable economic equilibrium andwhether the Australian economy is experiencing a stable equilibrium or not. Stable economic equilibriumEconomic equilibrium is a state, in which the economic forces, i.e. demand and supplyare in perfect balance. In this state, the values of economic variables remain unchanged if there isno external influence. As per the definition, equilibrium in an economy or market occurs, whenthe quantity demanded and quantity supplied becomes equal[ CITATION Cor13 \l 1033 ]. It is acondition when a price is established through the market competition, where the quantitydemanded by the buyers or consumers is equal to the amount of products or services areproduced or supplied by the producers. The price that is determined by this process is known ascompetitive price or market clearing price. This price will not change unless demand or supplychanges. The quantity is also known as competitive or market clearing quantity[ CITATIONFoe16 \l 1033 ].
Essay on Aspects of Stable Economic Equilibrium_2
2STABLE ECONOMIC EQUILIBRIUMDSP*Q*E*PriceQuantityFigure 1: Market Equilibrium(Source: Author)Figure 1 illustrates a perfect market equilibrium. The demand and supply curve for acommodity or services intersect at point E*. At this point, the quantity demanded is equal to thequantity supplied. P* is the market clearing price and Q* is the market clearing quantity. If thedemand and supply becomes unequal, the price goes either up or down from the equilibriumprice and the situation of excess demand or excess supply arises in the market or economy. In this context, the concept of stable equilibrium comes in. Equilibrium can be disrupteddue to external forces. A stable equilibrium arises when a system gravitates back to equilibriumafter it is shaken. The invisible hand, defined by Adams Smith in his book ‘The Wealth ofNations’, works as the mechanism that brings back a disturbed market situation into equilibrium[CITATION Bae15 \l 1033 ]. Due to external shocks, such as, changes in demand and supply for
Essay on Aspects of Stable Economic Equilibrium_3

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