Economic Equilibrium System of Markets - MyAssignmenthelp.com

Question: Discuss about the Economic Equilibrium System of Markets. Answer: Introduction: The term equilibrium stands for equal balance. According to physics, an object is referred to be in the state of balance when two forces of equal magnitude working in opposite direction balance each other. This concept of physics is not limited to it but is also applicable to economics and, the economists term it as equilibrium economics. Equilibrium is a state where any further change is not possible or applicable and two acting forces are not able to influence each other (Ponnusamy, 2017). Stable equilibrium - In stable equilibrium, if the economy of a company gets disrupted due to the change in any of its determining factors, it resumes back to the original point after self-adjustment and the original equilibrium is stored again. There is no net change in the initial and final equilibrium state of the company. This equilibrium can be observed when the demand price is equal to the supply price and there is no tendency of increase in the total amount produced. At this stage, the stable equilibrium is maintained. It can be compared to the pendulum as well which comes back to its original position just after it gets displaced (Conspecte.com, 2017). Concept of Stable Equilibrium In macroeconomics, when aggregate demand = aggregate supply, the stable equilibrium is established for the country. The factors that influence aggregate demand can be written as- C + I + G + Nx = increase or decrease in DD Where, P - price Q - quantity of good S - supply D - demand P0 - price of market balance A - surplus of demand - when PP0 B - surplus of supply - when PP0 In the above plotted graph between Price and quantity of the consumer product. This is a classical stable equilibrium example in economics. SS stands for a positively sloped demand curve and DD stands for a negatively sloped demand curve. Point E is the point of equilibrium where the supply and the demand are balanced. At this point only, OP (the equilibrium Price) and OQ (the equilibrium quantity) are determined. In a case when the supplied quantity is more than the quantity demanded, the surplus quantity will be to the level of AB. This forms a downward pressure on the price in the market. This pressure is kept applied downwards until the state of equilibrium is attained, i.e., the quantity demanded equals the quantity supplied - (Surplus) In a case when supplied quantity is less than the demanded quantity, it leads to shortage of the product in the market. This applies an upward pressure on the price of the product in the market and it pushes up the price to the level of equilibrium where the supplied quantity equals the demanded quantity - (Deficit) (Sharov, 1996) The economy of Australia is quite stable and resilient. It does not face major changes either progressive or regressive and comes back to its original value with minor alterations. Following the trend of GDP growth in Australia from the last 2-3 years, the GDP growth rate has remained to a value between 2.1% to 2.8%. This shows a stable yet growing trend of Australian economy. This stability is due to the following three reasons - housing, shopping, and mining (Jericho, 2016). The economy of Australia hit a recession in 1991 - 92 and from then, Australian economy has been recession free for last 26 years. The Australian economy is the second largest world economy that has not hit a recession for the longest time after Netherlands. The policies of RBA have kept Australia in such intact position. The RBA keeps the likelihood of financial instability reduces by keeping the inflation low (Reserve Bank of Australia, 2017). For this, the bank assesses a diverse range of aggregate economic and financial data to understand the stability of financial system. RBA also ensures the safety of the payment systems. It shares its views with CFR, APRA, and The Treasury on a regular basis. RBA controls the interest rate through its monetary policy. The monetary policy involves setting the interest rates in the market which, in turn, affects the inflation rate. In case of change in the interest rate, RBA controls the supply of the money (Hutchens, 2017). A comparison between interest rate and inflation rate of Australia Year Interest Rate Inflation rate 2012 3.00% 1.8% 2013 2.50% 2.5% 2014 2.50% 2.5% 2015 2.00% 1.5% 2016 1.50% 1.3% Conclusion Australia has maintained a stable equilibrium since the time it last hit recession. The policies designed by RBA are so effective and efficient that control the interest and the inflation rate. The increase in the interest rate eventually leads to inflation and the policies designed by Australian Reserve Bank have coped up with such problems well since last 25 years. References Conspecte.com. (2017). Economic equilibrium : a system of free markets is stable. Retrieved from Conspecte.com: https://conspecte.com/Economics/economic-equilibrium-a-system-of-free-markets-is-stable.html Hutchens, G. (2017). Australia's economy likely to keep growing in 2017, experts say. Retrieved from www.theguardian.com: https://www.theguardian.com/business/2017/feb/14/australias-economy-likely-to-keep-growing-in-2017-experts-say Jericho, G. (2016). Three reasons Australia's economy is so resilient . Retrieved from www.theguardian.com: https://www.theguardian.com/business/grogonomics/2016/mar/03/three-reasons-australias-economy-is-so-resilient-shopping-housing-and-yes-mining#img-1 Ponnusamy, S. (2017). Stable and Unstable Equilibrium. Retrieved from /owlcation.com: https://owlcation.com/social-sciences/Stable-and-Unstable-Equilibrium Reserve Bank of Australia. (2017). Monetary Policy. Retrieved from Rba.gov.au: https://www.rba.gov.au/monetary-policy/ Sharov, A. (1996). Equilibrium: Stable or Unstable? Retrieved from www.ma.utexas.edu: https://www.ma.utexas.edu/users/davis/375/popecol/lec9/equilib.html