HI5003 Economics for Business: Analysis of Stable Equilibrium

Answer the following question ensuring that you apply economic principles or theory related to understanding the health of the economy and the need for government intervention to inform your analysis and support your decisions. Communicate your ideas with correct grammar, spelling and writing style and support your answer with diagrams and examples as necessary.

 

Using an appropriate diagram, explain the concept of a stable economic equilibrium and provide your assessment of whether or not the Australian economy is currently at a stable equilibrium.

Introduction

Analysis of stable equilibrium is the focus of this paper. Stability is a state where deviation of that state brings back the state without intervention of any external force. The stability of an economy is implied by a stable state of income, price level, and employment condition and in its external sector. The autonomous operation of price mechanism maintains equilibrium in a single market. Both microeconomic and macroeconomic analysis of stability is needed to understand what is it and how it works. The stability of Australian economy is analyzed as a real world example of stability.

Stability meaning and adjustment

The stability adjustment in an individual market is maintained by the price. The autonomous supply and demand in the market first determine an equilibrium price and quantity. Price has a direct impact on both demand and supply (Fontana & Setterfield, 2016). When price deviates from equilibrium price then demand and supply adjusts in such a manner that price again moves to the equilibrium position. The adjustment towards stability through independent price mechanism is explained in the following diagram.

Figure 1: Demand, Supply and Equilibrium adjustment

(Source: as created by the Author)

The equilibrium point in the above figure is E. The equilibrium point determines the price and quantity the market as P_E and Q_E respectively. At any price above P_E, a resulted excess supply is obtained as high price motivated suppliers to supply more whereas is works against the willingness to pay of the buyers. At any price like P_1, there is an excess supply as shown in the figure. For any price, lower than the equilibrium price excess demand is occurred as consumers are benefitted more from a lower price than the suppliers are (Fisher, 2016). Such a situation is at the price level like P_2. The excess demand is shown in the figure above. This is how market maintains its stability and hence, E is an example of stable equilibrium.

Aggregate Demand and Aggregate Supply; Macroeconomics analysis

Overall picture of the economy is traced by the macroeconomics analysis. Aggregate demand and aggregate supply are the two major components here. Aggregate demand traces planned expenditure of the economy whereas aggregate supply is the actual expenditure of the economy (Quadrini, 2015). The matching of aggregate supply and aggregate demand in the economy determine equilibrium level of income and price level in the economy.

Figure 2: Macroeconomic equilibrium

(Source: as created by the Author)

Autonomous stability and stability using government policy instrument 

Autonomous stability is the stability achieved by the forces of aggregate demand and aggregate supply of the economy. However, it is not always the case that stability of the economy is maintained automatically. Government has to intervene to ensure stability in the crisis period, In terms of macroeconomics, stability of an economy is a state where the economy has mitigated its vulnerability to the external shocks. Government uses fiscal and monetary policy tool to maintain internal stability of the economy. Taxes and government expenditures are instruments under fiscal policy and money supply is a tool of monetary policies. The policy framework though different for different economies depending on characteristic of the economy, the objective is same that is to give a stable state to the economy.

Australian Economy; Analysis of stability 

Australian economy is viewed as a market dependent role with federal government gives assistance at times of need and helps to make efficient economic decision. The economy is an open economy, having trade relation with many of the developed nations. Performance of the economy in indicators like gross domestic product, unemployment and inflation rate helps to understand stability state of the economy.

Gross Domestic Product

Figure 3: GDP of Australia in last ten years

(Source: tradingeconomics.com)

Value of all the final goods and services are expressed under the single measure of Gross Domestic Product. Stability of GDP implies stability in major economic activities. The analysis of GDP for the last ten years has shown GDP of Australia has improved significantly in the last few years. GDP raises from 853.76 USD billion to 1204.62 USD billion in 2016.  The economy has experienced some volatility; however, it has regained its stability.

Inflation

Figure 4: Inflation in Australia

(Source: data.worldbank.org, 2017)

The figure above shows inflation rate in the economy has gone through some fluctuation. However, the overall inflation rate is declining.  The country is successful in achieving the inflation target of Reserve Bank of Australia (rba.gov.au, 2017). Therefore, price level can be said stable given its status.

Unemployment

Figure 5: Unemployment statistics of Australia

(Source: data.worldbank.org, 2017)

Unemployment in Australia has sharply fall in the last few years and then remain stable. However, employment opportunities mostly open for part time jobs and contribute to the overall decline of unemployment rates (Rios, McConnell & Brue, 2013).

Policy framework and stabilization instrument 

Government to maintain stability of the economy uses automatic and discretionary stabilizers. Tax receipts in the budget and expenses made by the governments are tools used under Automatic stabilizers. Automatic stabilizers affect aggregate demand in a counter cycle way and hence does not affect treasury or policy program at any level.

Another type of stabilization instrument is structural stabilizers. Unlike automatic stabilizers, discretionary stabilizers influence budget outcome and policy designing of the government. New tax rate here may be imposed on personal income or other types of taxing framework (Martorano, 2015).  Changes are also introduced here in government spending.

These are the policy tools used by the Australian government in order to sustain stability in the economy.

Conclusion 

In an individual market, stability refers to stability as maintained by tools of demand, supply and price mechanism. For the economy as a whole stability, analysis requires attention on performance of major indicators. GDP, unemployment, price level of Australia are considered for analysis Australian stability. In the past few years, the economy performs quite well and ensures a more or less stable state. The fluctuations occur in between are mitigated by government stability instrument Automatic stabilizer and discretionary stabilizer.

References 

Australia GDP | 1960-2017 | Data | Chart | Calendar | Forecast | News. (2017). Tradingeconomics.com. Retrieved 13 September 2017, from https://tradingeconomics.com/australia/gdp

Fisher, F. M. (2016). Adjustment processes and stability. The new palgrave dictionary of economics, 1-6.

Fontana, G., & Setterfield, M. (Eds.). (2016). Macroeconomic Theory and Macroeconomic Pedagogy. Springer.

Martorano, B. (2015). Lessons from the recent economic crisis: the Australian household stimulus package. International Review of Applied Economics, 29(3), 309-327.

Measures of Consumer Price Inflation | RBA. (2017). Reserve Bank of Australia. Retrieved 23 September 2017, from https://www.rba.gov.au/inflation/measures-cpi.html

Quadrini, V. (2015). The growth of emerging economies and global macroeconomic stability. Mimeo. University of Southern California.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.

Unemployment, total (% of total labor force) (modeled ILO estimate) | Data. (2017). Data.worldbank.org. Retrieved 22 September 2017, from https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?end=2016&locations=AU&start=2005&view=chart.