Answer to Assignment 1

The first model has an equilibrium price of $40 and an equilibrium quatity of 40.  If the system is shocked out of equilibrium it will oscillate around the equilibrium.  The system is stable because it eventually returns to equilibrium. 

 

to download the appropriate spreadsheet.

 

The second model has an equilibrium price of $40 but an equilibrium quantity of 80.  When shocked this model also oscillates, but rather than return to equilibrium its oscillations keep getting bigger and it gets further and further away from equilibrium.  This is an unstable model.

 

Clearly the stability of the model depends on the slopes of both the demand and supply curves.

 

To download a spreadsheet that allows you to explore this relationship