In economics, the market dynamics are determined by the changes in the demand and supply forces and their mutual interactions. The market is the place of interaction of these two forces and the economy is said to reach equilibrium when the demand and supply forces reach to a mutual agreement. Equilibrium is considered to be stable if the same is automatically restored in case of any deviation and no exogenous forces are required to bring it back to equilibrium. The report discusses the economic concept of stable equilibrium both in microeconomic and macroeconomic perspective and with the help of this notion the report tries to analyze whether the economy of Australia, in the current times, is in stable equilibrium or not (Fisher, 2016).
Stability in an economy:
In economics, the demand dynamics represent the behavior of the buyers and the supply dynamics show the seller’s side activities. The buyers and the sellers interact with each other to reach to a mutually agreeable point, which denotes the equilibrium in the market and is shown as follows:
Figure 1: Economic Stability
(Source: As created by the Author)
As can be seen from the above figure, the demand and the supply curve interact in the maker to bring stability in the economy. The equilibrium in the market occurs at the point where the demand and the supply curve intersects each other. In this case, the equilibrium occurs at the point E, with the equilibrium price being P0 and the equilibrium quantity being Q0. To see whether the equilibrium is a stable one the behavior of the demand supply forces in case of any deviation has to be taken into account, which is elaborated in the following section (Rios, McConnell & Brue, 2013).
If the price, for some circumstances, increase from P0 to P1, then due to the increase in the price level, according to the law of demand, the demand for the commodity will decrease. There may be two factors influencing the decrease in the demand. The buyers who were initially buying the product will now decrease their demand owing to a higher price as well as the marginal ones would completely go out of the market as the increase the price makes it impossible for them to buy any amount of the commodity. However, with the increase in price, the supply of the commodity will increase as more suppliers will venture in the concerned market. Therefore, an excess supply (of the extent of FG) will be created in the market, which will force the sellers to decrease their prices to sell the excess supply. This in turn will bring the prices down till P0, thereby restoring the initial equilibrium condition (Baumol & Blinder, 2015).
Again, the converse may happen with the price decreasing from P0 to P2, thereby increasing the demand for the good by both the existing as well as the marginal buyers. However, the fall in the price influences many sellers to reduce their supply or leave the market due to the loss of profitability, thereby reducing the supply. An excess demand (of AB extent) is created in the market and to clear this the price will be increased till P0, which will again restore equilibrium in the market (Rader, 2014). Therefore, it can be seen that the equilibrium in the above case is stable as any deviation from the equilibrium is followed by adjustment processes which again brings the market to the original equilibrium situation.
The above discussion, however takes into account the microeconomic perspective. Equilibrium and stability in the macroeconomic scenario is analyzed with the help of the concepts of aggregate demand and aggregate supply:
Figure 2: Stability in Macroeconomic Situation
(As created by the Author)
Various macroeconomic indicators together determine the stability in the economy as a whole. The GDP of the economy is determines the aggregate demand as well as aggregate supply in the economy. The process of reaching stability is similar to that in the microeconomic context, the stability being achieved by the interactions of the AD and the AS curve. The stability in price and income of an economy brings stability in the macroeconomic level (Mankiw, 2014).
Australian Economy: Stability Scenario:
The economy of Australia is more of a pro-market capitalistic economy, with the government playing the role of a supervisor and not that of controller. The economic decision as well as the activities and depend on the demand and supply forces in the market and not is not based on a centralized planning format. The price decisions are taken by the suppliers based on the price dynamics in the domestic as well as international market, with the objective of maximizing profit as well as satisfaction of the demand of the citizens (McLean, 2012).
The stability of the economy can be analyzed with the help of the GDP statistics of the country in the recent times:
Figure 3: GDP of Australia (2006-2016)
(Source: Tradingeconomics.com, 2017)
As is evident from the above figure, the growth of the GDP has been consistently stable in the last six years. Though there has been several fluctuations, but, they are not of any strikingly drastic in nature and the GDP of the economy has stably increased from 853.76 billion USD (2006) to 1204.62 billion USD (2016), which reflects the more or less impressive performance of the country in this aspect. However, with the highest GDP being 1567.18 billion USD in 2013, there is indication that the GDP has started to fall gradually post 2013.
The overall price level prevailing in the economy also reflects a lot about its stability as fluctuations in this aspect contributes to deviations from the equilibrium as well. The rate of inflation of a country shows the dynamics of the price levels prevailing in the same.
Figure 4: Inflation Rate: Australia
(Source: Tradingeconomics.com, 2017)
From the above figure it is evident that the current inflation rate, like that of the GDP, is more or less stable and moderate in Australia, with occasional fluctuations which are not dramatic in nature (Gould, 2013) .
The country, in case of economic fluctuations, uses different tools to bring back stability, two of which are as follows:
a) Automatic Stabilizer:
This tool, consisting of tax and expense framework of the Government, has a counter-cyclical method of influencing the aggregate demand in the economy, without influencing the treasures of the Government. Under this mechanism, the budget adjustments take place which takes it to surplus from deficit. The tax structures, including CGT, GST and others are included in this system.
b) Structural Stabilizer:
This instrument includes changes in the budgetary situations, including changes in tax structure, inclusion of new tax and expenditure structures, which have direct implications on the aggregate demand situations in the economy. These policies are generally taken in case of severe economic fluctuations, when the automatic stabilizers cannot bring the economy to equilibrium situation (De Grauwe, 2016).
As is evident from the above discussions, the stability of an equilibrium is achieved when after any deviation the economy comes back to its initial equilibrium. With respect to this concept, it can be seen that the economy of Australia, mostly depending on the market dynamics for its stability, is currently in a more or less stable dynamic equilibrium situation. In case of fluctuations, however, there are robust policies and instruments in the regulatory framework of the country, which may bring the economy back to stability.
Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News. (2017). Tradingeconomics.com. Retrieved 22 September 2017, from https://tradingeconomics.com/australia/gdp
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
De Grauwe, P. (2016). Economics of monetary union. Oxford university press.
Fisher, F. M. (2016). Adjustment processes and stability. The new palgrave dictionary of economics, 1-6.
Gould, J. D. (2013). Economic growth in history: survey and analysis. Routledge.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
McLean, I. W. (2012). Why Australia prospered: The shifting sources of economic growth. Princeton University Press.
Rader, T. (2014). Theory of microeconomics. Academic Press.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.