cobweb theory

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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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May 2018
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