Page 379 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes

The existence of General Equilibrium relates to the behaviour of sellers and buyers.

2. Stability of General Equilibrium

The general equilibrium exists when the equalization of demand and supply dismissed and the
excess demand or supply takes the demand and supply to its equilibrium state. Diagrammatically,
when demand curve intersects supply curve from upward, then the general equilibrium happens.
The equilibrium state is shown on Fig. 26.2 where D demand curve intersects S supply curve on
point E which is equilibrium point. In OP equilibrium price, OQ product quantity is sold and
bought. If the price falls from OP to OP then demand P d > P s supply and s d is excess demand.
2
2 1
1 1
2 1
Since demand is greater than supply so the price OP would come on equilibrium price OP. If
2
price goes from OP to OP the supply P s > P d where ds is excess supply. Since demand is lower
1
1
1
than supply so every seller will sell their product by decreasing its price. Thus, the competition
in seller the OP price will come in equilibrium price OP. Thus, in OP price point E represents the
2
equilibrium state.
Fig. 26.2

Excess
Price Supply S

P d s
1
P E
s
P 1 d 1
2
Excess
Demand
D
O Q
Quantity

On the other hand, non-equilibrium is the state where the equilibrium does not exist if once changes.
In geogramatical view, when demand curve intersects the supply curve downward then there is non-
equilibrium stage. This is represented in Fig. 26.3 where D demand curve is upward slopping and cuts
S supply curve in point E downward and OP is equilibrium price. If the price increases from OP to
OP then demand is P d > P s. The price goes up when demand is greater than supply and the excess
1
1
1
demand will not end even the price rises. This increases the problem because the equilibrium stage E
never gain again. Similarly, the instability is found downstream. When price falls from OP to OP then
2
d s is excess supply which again falls the price and thus, the equilibrium stage E never happens.
1 1

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