lectur2-page43

lectur2-page43 - equilibrium or not. If inventories are...

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Stable Illustrated above is what I call the “Consumption-Production Model” illustrated in equilibrium. We could use this model to examine a macroeconomic or microeconomic issue. When the rate of consumption of a commodity is just equal to it’s rate of production (=), the price of that commodity is stable at it’s equilibrium price, or market clearing price. You also notice that inventories are stable indicating that there is not a “shortage” or a “surplus” of the commodity. Inventories are often referred to as “buffer stocks”. Inventories are what many managers watch to determine whether a market is in
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Unformatted text preview: equilibrium or not. If inventories are increasing , this is an indication that the current rate of consumption is less than the current rate of production, and the market is not in equilibrium at the current price level. A surplus of the commodity is developing. If inventories are decreasing , this is an indication that the current rate of consumption is greater than the current rate of production, and the market is not in equilibrium at the current price level. A shortage of the commodity is developing. 43...
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