Stable Economic Equilibrium: Australia's Economic Stability

This essay delves into the concept of stable economic equilibrium, a crucial element for economic system stability and efficiency. It explores the interplay of demand and supply forces in determining market prices and achieving equilibrium, emphasizing the role of the market mechanism. The essay then analyzes the Australian economy, highlighting its long record of economic growth and its resilience during global financial crises. It discusses different interpretations of Australia's economic stability, including the influence of monetary and fiscal policies, exchange rate fluctuations, and the country's resource-based economy. The essay concludes that the Australian economy has, in fact, experienced a stable equilibrium due to these factors.

Running head: STABLE ECONOMIC EQUILIBRIUM
Stable Economic Equilibrium
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1STABLE ECONOMIC EQUILIBRIUM
Introduction
Equilibrium is a very important concept in economics. The stability and efficiency of an
economic system depends on equilibrium. The functioning of price and market mechanism
determines the unique combination for equilibrium of the system. The interplay of the forces of
demand and supply under price mechanism determine the prices of commodities and services at
which goods and services would be bought and sold. When market mechanism of an economy
performs efficiently, a stable equilibrium can be achieved by a country (Hatfield, Kominers,
Nichifor, Ostrovsky, & Westkamp, 2013). The following essay focuses on various aspects of a
stable economic equilibrium and whether the Australian economy is experiencing a stable
equilibrium or not.
Stable economic equilibrium
Economic equilibrium is a state, in which the economic forces, i.e. demand and supply
are in perfect balance. In this state, the values of economic variables remain unchanged if there is
no external influence. As per the definition, equilibrium in an economy or market occurs, when
the quantity demanded and quantity supplied becomes equal (Corsetti, Kuester, Meier, & Müller,
2013). It is a condition when a price is established through the market competition, where the
quantity demanded by the buyers or consumers is equal to the amount of products or services are
produced or supplied by the producers. The price that is determined by this process is known as
competitive price or market clearing price. This price will not change unless demand or supply
changes. The quantity is also known as competitive or market clearing quantity (Foerster, 2016).

2STABLE ECONOMIC EQUILIBRIUM
D
S
P*
Q*
E*
Price
Quantity
Figure 1: Market Equilibrium
(Source: Author)
Figure 1 illustrates a perfect market equilibrium. The demand and supply curve for a
commodity or services intersect at point E*. At this point, the quantity demanded is equal to the
quantity supplied. P* is the market clearing price and Q* is the market clearing quantity. If the
demand and supply becomes unequal, the price goes either up or down from the equilibrium
price 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 disrupted
due to external forces. A stable equilibrium arises when a system gravitates back to equilibrium
after it is shaken. The invisible hand, defined by Adams Smith in his book ‘The Wealth of
Nations’, works as the mechanism that brings back a disturbed market situation into equilibrium
(Baele, Bekaert, Cho, Inghelbrecht, & Moreno, 2015). Due to external shocks, such as, changes

3STABLE ECONOMIC EQUILIBRIUM
Surplus
Deficit
Quantity
Price
P*
P1
P2
Q*
S
D
E*
A B
C G
in demand and supply for any economic condition, the system equilibrium can be disturbed.
Through some procedures, the system comes back to equilibrium again.
Figure 2: Stability in market equilibrium
(Source: Author)
Figure 2 depicts the situations, which can bring instability in the economy. When supply
is higher than demand, excess supply or surplus arises in the market, shown by the line AB, and
price rises to P1 from P*. Similarly, when demand is higher than the supply, excess demand or
deficit arises in the economy, shown by the line CG, and price falls to P2. When there is stability
in the system, the market adjusts itself to bring back the equilibrium. This means, during surplus,
the market forces the price to go down to P* to reach an equilibrium and during deficit, the
market pushes the price up to the equilibrium price. This way stability can be achieved in the
system (Lima, Grasselli, Wang, & Wu, 2014).

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The Australian economy is one of the most developed economies in the world. The
economy is so stable that Australia has faced the longest run of economic growth among all the
developed countries in the world. Since 1991, the country has never faced two consecutive
quarters of negative growth or recession. During the Asian crisis and dot-com bubble, the
Australian economy remained stable. Even during the global financial crisis of 2008, Australia
was not directly hit by it. The country has low inflation, and lower unemployment rate and a
GDP of 1.205 trillion USD in 2016 (Austrade.gov.au., 2017).
There are two different interpretations of the stability in economy of Australia. The first
is the Australian model, which says, through the monetary and fiscal policies and exchange rate
fluctuations, the uncertainties in the economy can be reduced. According to RBA governor
Battellino, the exchange rate was flexible enough to go up and down as and when required.
When the international economy was turbulent, the exchange rate went down and currency was
depreciated (Battellino, 2013). The second interpretation was that, the country has tactfully
utilized its resources to keep the growth going. Mining was the major industry of Australian
economy. It created maximum number of jobs in the 1990s and 2000s. When the mining boom
started to fade away, the other non-resource sectors were getting developed. Currently the
service sector, especially the tourism, financial and insurance, information, media and telecom,
etc. are the major service sector industries. Hence, even if there was turbulence in the economy,
the Australian economy found out its own way to stabilize the situation (Thirlwell, 2013).
The country has got some other advantages, such as, educated and skilled work force,
population, strong and stable political and social condition, locational advantage, open and
liberal economies, which are used to maintain the stability of the economy, which in turn brings
about economic growth for more than twenty six years (Austrade.gov.au., 2017).

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Conclusion
It can be said that, the market has its own way to settle down. As described by Adam
Smith, the force that works to bring about equilibrium in the system or market when it is
disturbed, is known as invisible hand. Equilibrium is the situation when market demand equals
market supply. For the nations, when the aggregate demand equals aggregate supply in the
economy, it is known to be in equilibrium. With the record of consistent growth of Australia, it
can be said that the country has experienced a stable equilibrium.

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References
Austrade.gov.au. (2017). Australia has experienced the longest period of economic growth in the
developed world. Retrieved from Austrade.gov.au. :
https://www.austrade.gov.au/news/economic-analysis/australia-has-experienced-the-
longest-economic-growth-among-major-developed-world
Baele, L., Bekaert, G., Cho, S., Inghelbrecht, K., & Moreno, A. (2015). Macroeconomic regimes.
Journal of Monetary Economics, 70, 51-71.
Battellino, R. (2013, September 10). Twenty Years of Economic Growth. Retrieved from
www.rba.gov.au: https://www.rba.gov.au/publications/bulletin/2013/sep/pdf/bu-0910-
13.pdf
Corsetti, G., Kuester, K., Meier, A., & Müller, G. (2013). Sovereign risk, fiscal policy, and
macroeconomic stability. The Economic Journal, 566.
Foerster, A. (2016). Monetary policy regime switches and macroeconomic dynamics.
International Economic Review, 57(1), 211-230.
Hatfield, J., Kominers, S., Nichifor, A., Ostrovsky, M., & Westkamp, A. (2013). Hatfield, J.W.,
Kominers, S.D., Nichifor, A., OstrovskStability and competitive equilibrium in trading
networks. Journal of Political Economy 121(5), 966-1005.
Lima, B., Grasselli, M., Wang, X., & Wu, J. (2014). Destabilizing a stable crisis: Employment
persistence and government intervention in macroeconomics. . Structural Change and
Economic Dynamics (70), 30-51.

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Thirlwell, M. (2013). Can Australia Keep Beating The Economic Odds? . Retrieved from Pacific
Standard: https://psmag.com/social-justice/australia-economy-recession-53744