On page 43 of Schweser notes, it indicateds that unstable market equilibria result when a downward sloping supply curve is less teeply sloped than the demand curve, so that excesss supply tends to drive prices up and excess demand tend to drive prices down (further away from equilibrium
Can anyone confirm the second part where excess supply tends to drive prices up? I believe in unstable market equilibria, excess supply would push prices down, further away from equilibrium, and excess demand pushing prices upward.
Thanks in advance.作者: jbaldyga 时间: 2013-8-9 10:37
Excess supply drives prices down (in stable and unstable markets) and excess demand drives prices up.
However in unstable markets there is a tendancy to move away from the equilibrium, because supply is steeper (downwards) sloped. So above the intersect (equilibrium) there is a tendency to higher prices (excess demand) and below the intersect there is a tendency to lower prices (excess supply). So the market can spiral to higher prices (bubble), or to lower prices. Basically a stable market has a tendency towards equilibrium, unstable does not.作者: PalacioHill 时间: 2013-8-9 10:38
Suppose that both the supply curve and the demand curve slope downward. If the quantity demanded increases, then the quantity supplied will increase, lowering the price (because the supply curve slopes downward). The lower price leads to a greater quantity demanded, and a greater quantity supplied, further lowering of the price, and so on; the market moves away from the equilibrium point.
Similarly, if the quantity demanded decreases, the quantity supplied will decrease, increasing the price (because the supply curve slopes downward). The higher price leads to a lower quantity demanded, and a lower quantity supplied, further increasing the price, and so on; the market moves away from the equilibrium point.
