F Distinguish between stable and unstable equilibria, including price bubbles, and ID instances of such equilibria Flashcards
A stable equilibrium is one for which movement of the price away from its equilibrium level results in forces that drive the price back towards equilibrium. An unstable equilibrium is one for which a movement of the price away from its equilibrium level results in forces that move the price further from its equilibrium level. While price equilibria are typically stable, if the supply curve is downward sloping and less steep than the demand curve, the resulting equilibrium is unstable. The term
Stable equilibrium (A stable equilibrium is one for which movement of the price away from its equilibrium level results in forces that drive the price back towards equilibrium)
A downward sloping supply curve more steeply sloped than the demand curve would result in a stable equilibrium. A downward sloping supply curve parallel to the demand curve would not result in any equilibrium quantity or price.
Price changes due to surplus or shortage will converge to market equilibrium An equilibrium is considered stable when there are forces that move price and quantity back towards equilibrium values when they deviate from those values. As long as slope cuts demand from above, equilibrium will be stable Prices above Equilibrium: Excess Supply: Surplus>Downward pressure on price>Firms offer lower prices to consumers>Perfect Competition Prices below Equilibrium: Excess Demand: Shortage>Upward pressure on price>Consumers offer higher prices to firms> Most $$$ wins
A stable market equilibrium is best described as one in which:
excess supply drives prices lower and excess demand drives prices higher.
Stable market equilibria are defined as those in which excess supply tends to drive prices lower and excess demand tends to drive prices higher. Unstable equilibria are characterized by a downward sloping supply curve that is less steeply sloped than the demand curve, so that excess supply tends to drive prices up and excess demand tends to drive prices down (further away from the equilibrium value). The current market price and the equilibrium price can be equal in either stable or unstable equilibria.
Unstable equilibrium (An unstable equilibrium is one for which a movement of the price away from its equilibrium level results in forces that move the price further from its equilibrium level.)(If a supply curve slopes downward and is less steeply sloped than the demand curve, prices above or below equilibrium will tend to get further from equilibrium, which means the equilibrium is unstable. )
Demand and Supply both downward sloping (labor market and backward bending supply curve) Supply curve is less steeply sloped than the demand curve, and prices above (below) equilibrium will tend to get further from equilibrium. Supply more elastic > Demand (supply intersects demand from below)
While price equilibria are typically stable, if the supply curve is downward sloping and less steep than the demand curve, the resulting equilibrium is unstable.
An unstable market equilibrium results when:
prices above or below equilibrium drive the price away from equilibrium.
An equilibrium is unstable if a price above equilibrium results in excess demand or a price below equilibrium results in excess supply, because in these situations competitive forces would drive the price away from its equilibrium level instead of toward it. This would be the case if the supply curve for a good was both downward sloping and less steeply sloped than the demand curve. A normal, upward-sloping supply curve of any steepness results in a stable equilibrium at the price and quantity where it intersects the demand curve.
Price Bubbles (The term “bubble” refers to an unsustainable increase in price of an asset type resulting from an expecation that price increases in the current period will lead to higher future prices.)(A price “bubble” is most likely to result from: increases in price that increase expected future prices. Price bubbles can result when price increases in the current period increase expected future prices, which causes further increases in current prices. At some point prices become unsustainably high, the bubble bursts, and price falls sharply. )
The consequence of irrational behavior, not intrinsic value where market participants take recent price increases as an indication of higher future asset prices which increases the demand for the asset (rightward shift>higher expected future prices) and increases the equilibrium price of the asset. Eventually the bubble ‘breaks’ and the price approaches its equilibrium price or even below it in the short run.
What produces two equilibria - stable and unstable?
A nonlinear supply function
