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THIRD RULE OF INEQUALITY: The third of seven basic rules of the economy. It is a fact of life that resources, income, and wealth are not equally distributed. Some people have more and some people have less. Why is this so? We can look to the age-old distinction between nature and nurture for insight. On the nature side, some people are born with more talents, abilities and intelligence than others, which they use to gain ownership and control of income-generating and wealth-producing resources. On the nurture side, some people work harder to develop skills, acquire education, and uncover opportunities that lead to ownership and control of income-generating and wealth-producing resources (human capital).

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STABLE EQUILIBRIUM:

Equilibrium that is restored if disrupted by an external force. Most economic models have equilibrium that is stable, reflecting the observation that the real world adapts to changes and maintains a fair degree of stability. The alternative to a stable equilibrium is an unstable equilibrium.
A stable equilibrium exists if a model or system gravitates back to equilibrium after it is shocked. The analogy is much like a marble resting at the bottom of a bowl. Should the marble be nudged a bit up one side of the bowl, it returns, eventually coming to rest at the bottom once again.

A common example of a stable equilibrium in the study of economics is a market equilibrium. Should the equilibrium be disrupted, the market returns to equilibrium.

The process works like this:

What makes this a stable equilibrium is that balance is restored automatically, through the fundamental workings of the market. In particular, the price changes in the correct direction to eliminate the shortage or surplus.
  • Shortage: A shortage arises if the market price is below the equilibrium price. The quantity demanded exceeds the quantity supplied. The shortage then prompts the price to rise. Buyers, who are unable to buy as much of the good as they want, bid the price higher. A higher price is exactly the remedy needed. The price rise causes a decrease in the quantity demanded (according to the law of demand) and an increase in the quantity supplied (according to the law of supply). Both changes in quantity act to reduce and eventually eliminate the shortage, thus restoring equilibrium.

  • Surplus: A surplus arises if the market price is above the equilibrium price. The quantity supplied exceeds the quantity demanded. The surplus then prompts the price to fall. Sellers, who are unable to sell as much of the good as they want, force the price lower. A lower price is exactly the remedy needed. The price decline causes an increase in the quantity demanded (according to the law of demand) and a decrease in the quantity supplied (according to the law of supply). Both changes in quantity act to reduce and eventually eliminate the surplus, thus restoring equilibrium.

The contrast to stable equilibrium is unstable equilibrium. The preceding market equilibrium is unstable if a shortage causes the price to fall, rather than rise, and a surplus causes the price to rise, rather than fall. In this case, the price movement increases the shortage or surplus, moving the market farther away from equilibrium.

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STABLE EQUILIBRIUM, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: June 27, 2022].


Check Out These Related Terms...

     | unstable equilibrium | equilibrium | market equilibrium | equilibrium price | equilibrium quantity |


Or For A Little Background...

     | equilibrium | demand determinant | supply determinant | demand curve | supply curve | law of supply | law of supply | ceteris paribus |


And For Further Study...

     | comparative statics | shortage | surplus | invisible hand | self correction, market | graphical analysis, market equilibrium | market disequilibrium | invisible hand | market clearing | competitive market |


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