Dampened Market Correction via Negative Feedback Following a Minor Expectation-Driven Demand Shift

Figure 8.11: Dampened Price Shock and Stable Equilibrium

A market for a particular good has a long-run equilibrium price of $50 per unit. A sudden, temporary shortage causes the price to spike to $70 in one period. In the following periods, the price is observed to be $60, then $55, then $52.50. Which of the following statements best analyzes this market's behavior?

Analyzing Market Stability with a Price Dynamics Curve

The Mechanism of Stable Equilibrium

Contrasting Market Stability and Instability

If a market's price dynamics are represented by a curve that is steeper than the 45-degree line, any small deviation from the equilibrium price will trigger a self-correcting process that returns the price to its original level.

Match each market characteristic or event with its correct implication regarding price stability.

A market is in a stable equilibrium when a temporary supply disruption causes the price to jump above its long-run level. Arrange the following events in the correct chronological order to show how negative feedback restores the market to its original equilibrium.

For a market equilibrium to be considered stable, any price deviation must trigger a corrective process. This is represented graphically by a price dynamics curve that is flatter than the 45-degree line, which ensures that ______ feedback will guide the price back towards its initial level.

Analyzing Price Dynamics with a Linear Model

In a particular market, the long-run equilibrium price for a product is $100. Market analysts have determined that after a price deviation, the price in the next period adjusts to close half the gap between the previous period's price and the equilibrium price. For example, if the price were $110, the gap is $10, so the price would fall by $5 to $105 in the next period.

Suppose a temporary supply disruption causes the price to jump to $140. Based on the described adjustment process, what will the price be in the subsequent period, and what does this indicate about the market's equilibrium?