<p>My doubt pertains to something that is mentioned in the book by Koutsoyiannis for microeconomics (in the chapter for general equilibrium).</p>

<p><a href="http://www.upload.ee/image/5306829/1.jpg" rel="nofollow">http://www.upload.ee/image/5306829/1.jpg</a>
<a href="http://www.upload.ee/image/5306839/2.jpg" rel="nofollow">http://www.upload.ee/image/5306839/2.jpg</a></p>

<p>I do not understand why the partial equilibrium is unstable in the case of the upward sloping demand and downward sloping supply curve.</p>

<p>Are we implicitly assuming that the natural reaction for price setters to positive excess demand is to increase the price and negative excess demand (excess supply) to decrease the price?</p>

<p>If that is not the case then I cannot understand why the equilibrium is unstable.</p>

<p>I'm also confused because the book does mention in the case of upward demand and downward supply that prices will react in a stability forming manner (or is this the book trying to say that this is how prices SHOULD work to ensure stability, then saying that this is not the case due to the implicit assumption above).</p>

<p>Thank you!</p>

CC BY-SA 3.0
2015-11-03T14:07:33.253Z
Can you tell us how stability is defined in your book? Often, stability is a concept referring to dynamics, i.e. we consider time, but that doesn't seem to be the case here.
Also note that it is rather easy to show that supply curves cannot be downward sloping.
BB King
CC BY-SA 3.0
2015-11-03T15:01:31.367Z
@BB King this is about dynamics, the short story/explanation gives the sign of the change in price w.r.t time. Industry supply curves can be downward sloping given special circumstances for example if we have external economies of scale.
Giskard
CC BY-SA 3.0
2015-11-05T14:25:53.610Z
Sorry, somehow the links in the post keep changing for me, When I wrote the comment, there was only a picture no text/story. Anyway, I agree with you OP, I believe the book assumes the walrasian auctioneer always increaes prices in the face of excess demand. There's no other explanation for the unstable equilibrium. At least Starr's General Equilibrium Theory (2012) defines stability as "whether a price formation mechanism that raises prices of goods in excess demand and reduces those in excess supply will converge to market clearing prices".
BB King
<microeconomics><general-equilibrium>
A stable equilibrium with demand and supply?
user6143
# A stable equilibrium with demand and supply?

(Asked by: username_0 on 2015-11-03)

My doubt pertains to something that is mentioned in the book by Koutsoyiannis for microeconomics (in the chapter for general equilibrium).

<http://www.upload.ee/image/5306829/1.jpg>
<http://www.upload.ee/image/5306839/2.jpg>

I do not understand why the partial equilibrium is unstable in the case of the upward sloping demand and downward sloping supply curve.

Are we implicitly assuming that the natural reaction for price setters to positive excess demand is to increase the price and negative excess demand (excess supply) to decrease the price?

If that is not the case then I cannot understand why the equilibrium is unstable.

I'm also confused because the book does mention in the case of upward demand and downward supply that prices will react in a stability forming manner (or is this the book trying to say that this is how prices SHOULD work to ensure stability, then saying that this is not the case due to the implicit assumption above).

Thank you!

**Tags:** microeconomics, general-equilibrium
> **Comments:**
> **username_1**: Can you tell us how stability is defined in your book? Often, stability is a concept referring to dynamics, i.e. we consider time, but that doesn't seem to be the case here. Also note that it is rather easy to show that supply curves cannot be downward sloping.  
> **username_2**: @BB King this is about dynamics, the short story/explanation gives the sign of the change in price w.r.t time. Industry supply curves can be downward sloping given special circumstances for example if we have external economies of scale.  
> **username_1**: Sorry, somehow the links in the post keep changing for me, When I wrote the comment, there was only a picture no text/story. Anyway, I agree with you OP, I believe the book assumes the walrasian auctioneer always increaes prices in the face of excess demand. There's no other explanation for the unstable equilibrium. At least Starr's General Equilibrium Theory (2012) defines stability as "whether a price formation mechanism that raises prices of goods in excess demand and reduces those in excess supply will converge to market clearing prices".  

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## 0 answers

