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Direction: Read the passage and answer the question
Title: "The Theory of Economic Equilibrium"
In economic theory, the concept of equilibrium holds a central position. It represents a state where economic forces balance, resulting in stability and absence of net change. Understanding this theoretical construct is crucial for predicting market behaviours and making informed economic decisions.
The equilibrium price, for instance, is the price at which the quantity of a good or service demanded by buyers equals the quantity supplied by producers. This equilibrium point signifies a balance in the market, where neither surpluses or shortages exist.
One key factor influencing equilibrium is the law of supply and demand. When demand for a product or service exceeds its supply, prices tend to rise, encouraging producers to increase their output. Conversely, when supply exceeds demand, prices tend to fall, incentivizing producers to reduce production.
Moreover, the concept of equilibrium extends beyond individual markets to macroeconomic equilibrium. This pertains to the overall balance between aggregate demand and aggregate supply in an economy. Achieving macroeconomic equilibrium is a primary objective for economic policymakers, as it signifies a state of full employment and stable price levels.
Understanding the intricacies of economic equilibrium requires a nuanced grasp of the factors affecting supply and demand dynamics, as well as the broader economic conditions influencing market behaviours. It serves as a foundational principle for economic analysis and decision-making.
Question:
What is identified as a foundational principle for economic analysis and decision-making in the passage?
The concept of equilibrium
The law of supply and demand
The theory of economic fluctuation
The concept of market surpluses
Answers (1)
The passage highlights that understanding the intricacies of economic equilibrium serves as a foundational principle for economic analysis and decision-making.
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