The supply curve is backward bending and the demand curve is downward sloping. They intersect at two points: , at a high price and low quantity (on the backward-bending upper branch of supply), and , at a lower price and higher quantity (on the normally rising lower branch of supply). Which of the following statements is CORRECT?
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Answer: (B)
Under Walrasian adjustment price rises with excess demand and falls with excess supply. An equilibrium is stable when, just above it, the market shows excess supply that pushes price back down. This holds where supply cuts demand from below (supply less steeply positive, or normally sloped, relative to demand).
At the rising lower branch of supply crosses the downward demand curve in the usual way, so a small price rise creates excess supply and price returns to : stable. At the supply curve is on its backward-bending branch and crosses demand from above, so a small price rise generates excess demand that drives price further from : unstable. Only is stable, option (B).
It is tempting to treat every intersection of supply and demand as stable; the backward-bending branch reverses the usual slope comparison at , making it unstable.
The supply curve Sₓ is backward bending and the demand curve Dₓ is downward sloping. They intersect at two points: M, at a high price P_(x_M) and low quantity x_M (on the backward-bending upper branch of supply), and N, at a lower price P_(x_N) and higher quantity x_N (on the normally rising lower branch of supply). Which of the following statements is CORRECT? (A) Only M is stable equilibrium (B) Only N is stable equilibrium (C) Both M and N are stable equilibria (D) Both M and N are unstable equilibria
Also written as: The supply curve S_x is backward bending and the demand curve D_x is downward sloping. They intersect at two points: M, at a high price P_(x_M) and low quantity x_M (on the backward-bending upper branch of supply), and N, at a lower price P_(x_N) and higher quantity x_N (on the normally rising lower branch of supply). Which of the following statements is CORRECT?
Perfect competition has come up 115 times in 7 exams since 2006.
This question is on Market equilibrium and comparative statics, part of Perfect competition in Microeconomics.
Finding equilibrium from demand and supply and tracing how it moves when either curve shifts.
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Question from the IIT JAM 2022 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.