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Business Economics Notes: Equilibrium (1.2)

Theories of Equilibrium (Ideal situation where D=S)
*Disequilibrium = inequality or absence in equality

1. Cobweb Theory - the market adjusts to equilibrium over time 
* NO stable growth 

2. Say's Law of Markets (by Jean Baptiste Say) - Production (S) creates its own market (D)

  • If D>S then P
    • Inflation - P
    • Demand Push v. Cost Pull (i.e. Salary↑ - P↑)
  • If D<S, non-satisfaction of needs
    • Deflation - reduction in price level (i.e. rollback of prices) - P
    • Profit  P
3. Actual price Theory - whatever P is paid is the equilibrium
  • D = f(P)
  • S= f (P)
  • D = a-bP
    • a = D-intercept or level of D when P is 0
    • b = slope of the D function

When P is zero
Item = FREE good/service

S = a + b P (NOTE: + because direct relationship)
a = s intercept or level of S when P is zero
b = slope of S function