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Note that there are two combinations of price and quantity that would equate quantity supplied and demanded, hence two equilibria. The lower-priced equilibrium is stable, with a positively sloped supply curve and a negatively sloped demand curve. However, the higher-priced equilibrium is unstable because at a price above that equilibrium price there would be excess demand, thus driving price even higher. At a price below that equilibrium there would be excess supply, thus driving price even lower toward the lower-priced equilibrium, which is a stable equilibrium.

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3.7. The Market Mechanism: Iterating toward Equilibrium—or Not
elow equilibrium because there would be excess supply. If supply were non-linear, there could be multiple equilibria, as shown in Exhibit 11. Exhibit 11. Stability of Equilibria: II <span>Note that there are two combinations of price and quantity that would equate quantity supplied and demanded, hence two equilibria. The lower-priced equilibrium is stable, with a positively sloped supply curve and a negatively sloped demand curve. However, the higher-priced equilibrium is unstable because at a price above that equilibrium price there would be excess demand, thus driving price even higher. At a price below that equilibrium there would be excess supply, thus driving price even lower toward the lower-priced equilibrium, which is a stable equilibrium. Observation suggests that most markets are characterized by stable equilibria. Prices do not often shoot off to infinity or plunge toward zero. However, occasionally we do


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