Question:
When the supply curve Sx is backward bending and the demand curve Dx is downward sloping as shown in the figure, there are two equilibria M and N, respectively. Which of the following statements is CORRECT?
When the supply curve Sx is backward bending and the demand curve Dx is downward sloping as shown in the figure, there are two equilibria M and N, respectively. Which of the following statements is CORRECT?
Updated On: Dec 13, 2025
- Only M is stable equilibrium
- Only N is stable equilibrium
- Both M and N are stable equilibria
- Both M and N are unstable equilibria
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The Correct Option is B
Solution and Explanation
To understand the stability of equilibrium points M and N in the given supply and demand curves, we need to analyze the characteristics of the curves at these points.
1. **Backward Bending Supply Curve (Sx):** This curve initially slopes upward (positive slope), reaches a maximum, and then bends backward (negative slope).
2. **Downward Sloping Demand Curve (Dx):** This curve slopes downward, which indicates that as price decreases, the quantity demanded increases, following the law of demand.
The intersection points M and N are potential equilibrium points. To determine their stability, we apply the basic concept of equilibrium stability:
- An equilibrium is stable if any small deviation from it leads to forces that move the system back to equilibrium.
- An equilibrium is unstable if any small deviation from it leads to forces that move the system further away from equilibrium.
3. **Analysis of Point M:**
- At point M, the supply curve is sloping downward (backward-bending part), whereas the demand curve is sloping downward.
- This configuration implies that an increase in quantity from M reduces the price, leading suppliers to further decrease quantity (further deviations from M).
- Hence, point M is an unstable equilibrium.
4. **Analysis of Point N:**
- At point N, the supply curve is sloping upward (normal part), while the demand curve continues to slope downward.
- This configuration indicates that any increase in quantity would increase prices, and suppliers would increase supply to restore equilibrium.
- Hence, point N is a stable equilibrium.
Based on the analysis, the correct statement is: Only N is stable equilibrium.
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