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Market Price Stability and Tipping Points
Imagine a market where the price of a good can settle at two different, stable levels: a low price and a high price. Between these two stable levels, there exists a single, unstable intermediate price level. Explain why a small, temporary disturbance that pushes the market price slightly away from one of the stable levels will result in the price returning to that same stable level, whereas a similar small disturbance that pushes the price away from the unstable intermediate level will cause the price to move dramatically towards either the low or the high stable price level. In your answer, describe the forces at play in each scenario.
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Figure 8.14: An S-Shaped PDC with Two Stable Equilibria
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Market Price Stability and Tipping Points
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