Does unstable equilibrium exist in real life?

Does unstable market equilibrium exist in real life? In Reading 13, exhibit 10, panel B. Both demand and supply is negatively sloped, demand is steeper, if the price is above the equilibrium price, there will be excess demand, causing the price to move further away from the equilibrium price. Does this actually exist in real life or just another hypothetical that economist likes to invent like Giffen goods?

It exist in reality, most prices are not fixed, and the supply and demand factor cause changes in price, and until we have equivalence in demand and supply, which then lead to a stable equilibrium.

So yes, unstable equilibrium do exist.

Your explanation is very generic. Do you have any real life example, which was what I was asking.

Bubbles on stock or real estate market are examples of unstable equilibrium. You might check this info in Curriculum, Schwesser, Google or anywhere…

Bubble burst, which makes it fall back to the equilibrium. Therefore in the long run, it is still stable.

In the long run, we are all dead (and everything is unstable). :slight_smile:

I don’t think that it is appropriate to talk about unstable equilibrium in the long run since unstable equilibrium is transient.

You will have unstable equilibrium when higher prices is met with higher demand for instance.

If a market has an unstable equilibrium, its destiny is to die/desappear.

Using your graph, if the price goes upper than the initial equilibrum (demand=supply), then the higher the price, the lower the quantity supplied until it (the quantity) reaches zero, so the market deseappears.

If the the price goes lower than the initial equilibrium, then the lower the price, the higher the quantity supplied until the market is economically unsustanable (because the price becomes zero ) . The market desappears.

What markets in the present or in the past have suffered this? I don’t know any exact example, perhaps something with not much social impact.

If you have a decreasing-cost industry, you can have an unstable equilibrium. This sort of thing probably happens for a while in young, high-tech industries, while there are still significant economies of scale to exploit.

What equilibrium has a black market, heroin market for example?

They don’t have unstable equilibriums, indeed can change over time in structure, but they must have a known equilibrium. For example, black markets provide goods hard to get in normal markets with a reasonable price (since many years in many countries). Heroin and other drugs in general provide those substances at high prices and they are still bought (low elasticity of demand). At the end. they are stable “markets”.

What about external impacts on supply and demand on black markets, Ex. Shortages caused by police action etc? It cannot cause anomalies there?

Thats right, interventions actually change those black markets’ structures, however they eventually converge to a reasonably price-and-quantity equilibrium, so they have stable equilibriums.