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Business, Economics, MBA, revision

Equilibrium, Disequilibrium and cobwebs!!

Distinguish between equilibrium and disequilibrium in the market and explain why equilibrium is so important in classical economics. 

It is understood that in economics there are the supply and demand curves. The demand curve shows a representation of the responsiveness of demand to price change (which with normal goods is a negative correlation ie the lower the price the higher the demand and vice versa). The supply curve demonstrates the willingness for suppliers to supply goods at varying prices, and this relationship is normally seen to be a positive correlation (that meaning the higher the possible price, the more a supplier is willing to supply of that good). The equilibrium point is that where these two lines cross, and can be classed as ‘where supply meets demand’. There is no tendency for change from this point, assuming ceteris paribus (ie no other factors change).

In classical economics, where the markets are the sole driver of economic function it is believed that the market will always strive toward equilibrium and that when the markets are said to be in disequilibrium (ie not sitting at the intersection of supply and demand curves) that they should be left alone and will naturally find the equilibrium point once more.

It is also important to note that the cobweb theory of supply and demand states that as the market strives to settle back into the equilibrium position, then the market can implode (ie the supply and demand fluctuate in ever smaller circles around the equilibrium) or explode (ie the supply and demand will fluctuate around the equilibrium point, in ever widening circles). The imploding model is called stable cobweb theory and results when the demand curve is elastic, and the supply curve is inelastic. The exploding model is called the unstable cobweb theory and results from inelastic demand curve, and the supply curve is elastic.

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About loganjehall

I focus on building an internal culture focussed on listening to and working alongside customers to build value for all stakeholders. Real lasting change that understands the real needs of the customer is the only way to ensure a dynamic constant state of learning and innovation. I am a highly experienced sales, marketing and business professional with wide ranging experience in varied industries. Having worked in both B2B and B2C I understand sales and business is really about P2P (people to people) and therefore always focus on relationships and engagement. "Business is socialising with a purpose" (Gaping Void) Passion, people, vision, strategy, customers, advocates, believers, innovation, customer engagement, social, knowledge management and appropriate use of technology are vital in the attainment of business goals. I am a co-founder of Movebubble, a new technology startup in #Proptech. This blog is really here to allow me to develop my voice and ideas, and gain feedback from a wider audience than just the lecture or breakout room. Hopefully i can introduce some interesting points, and experiment with digital, marketing, engagement, social media and SEO techniques and tips i am learning on the way. I hope you enjoy my posts, please let me know what you think with some feedback.

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  1. Pingback: The evolution of economic theory and practice up to 2007 « loganjehall - January 10, 2012

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