2. Does equilibrium really exist? Research about Vernon Smith’s experiment. Discuss in depth what he did and did it prove the existance of equilibrium or not

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2. Does equilibrium really exist? Research about Vernon Smith’s experiment. Discuss in depth what he did and did it prove the existance of equilibrium or not.
In economics, economic equilibrium is a situation in which economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. For example, in the standard text perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal.
Market equilibrium in this case is a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes, and quantity is called the "competitive quantity" or market clearing quantity. But the concept of equilibrium in economics also applies to imperfectly competitive markets, where it takes the form of a Nash equilibrium.
An economic equilibrium is a situation when the economic agent cannot change the situation by adopting any strategy. The concept has been borrowed from the physical sciences. Take a system where physical forces are balanced for instance.This economically interpreted means no further change ensues.
Three basic properties of equilibrium in general have been proposed by Huw Dixon. These are:

  • Equilibrium property P1: The behavior of agents is consistent.

  • Equilibrium property P2: No agent has an incentive to change its behavior.

  • Equilibrium property P3: Equilibrium is the outcome of some dynamic process (stability).

C ompetitive Equilibrium: Price equates supply and demand.

  • P – price

  • Q – quantity demanded and supplied

  • S – supply curve

  • D – demand curve

  • P0 – equilibrium price

  • A – excess demand – when P

  • B – excess supply – when P>P0

In a competitive equilibrium, supply equals demand. Property P1 is satisfied, because at the equilibrium price the amount supplied is equal to the amount demanded. Property P2 is also satisfied. Demand is chosen to maximize utility given the market price: no one on the demand side has any incentive to demand more or less at the prevailing price. Likewise supply is determined by firms maximizing their profits at the market price: no firm will want to supply any more or less at the equilibrium price. Hence, agents on neither the demand side nor the supply side will have any incentive to alter their actions.
To see whether Property P3 is satisfied, consider what happens when the price is above the equilibrium. In this case there is an excess supply, with the quantity supplied exceeding that demanded. This will tend to put downward pressure on the price to make it return to equilibrium. Likewise where the price is below the equilibrium point there is a shortage in supply leading to an increase in prices back to equilibrium. Not all equilibria are "stable" in the sense of equilibrium property P3. It is possible to have competitive equilibria that are unstable. However, if an equilibrium is unstable, it raises the question of reaching it. Even if it satisfies properties P1 and P2, the absence of P3 means that the market can only be in the unstable equilibrium if it starts off there.
In most simple microeconomic stories of supply and demand a static equilibrium is observed in a market; however, economic equilibrium can be also dynamic. Equilibrium may also be economy-wide or general, as opposed to the partial equilibrium of a single market. Equilibrium can change if there is a change in demand or supply conditions. For example, an increase in supply will disrupt the equilibrium, leading to lower prices. Eventually, a new equilibrium will be attained in most markets. Then, there will be no change in price or the amount of output bought and sold — until there is an exogenous shift in supply or demand (such as changes in technology or tastes). That is, there are no endogenous forces leading to the price or the quantity.
Not so long ago, economics was considered a rather complex science in its structure, studying natural processes that cannot be tested in laboratory experiments. However, over time, it became clear that the assessment of hypotheses based only on historical data is not able to fully explain current events in the economy. Gradually, the put forward theories began to be studied with the help of an artificial experiment, creating all the necessary conditions for testing a particular hypothesis. This is how experimental economics was born.

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