A competitive market equilibrium is a stable equilibrium. What does that mean and what forces create...

A competitive market equilibrium is a stable equilibrium. What does that mean and what forces create this stability?

Expert Solution

A competitive market equilibrium is a stable equilibrium because the price here are market driven and the sellers are not the price makers. Hence the equilibrium i.e. price and the quantity sold is market fixed.

If the seller increases the prices to raise profits the buyers will move on to the other sellers as the products are exact same, which would reduce the demand and bring the seller again to earning normal profits.

If the sellers reduce the prices to raise the demand, this strategy would work for a short duration but in the long run the seller will be unable to raise the supply and hence will have to increase the price and come to the equilibrium.

Rahul Sunny answered 2 years ago

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