Discuss the Walras theory of Stability.
⇒According to Walras the system is stable when either negatively sloping demand curve intersects positively sloping supply curve or negatively sloping demanded curve intersects negatively sloping but cheaper supply. In both the cases, any price above the equilibrium price would mean quantity demanded less than the quantity supplied. Thus the price will returned to the original equilibrium level.
The system will be unstable when negatively sloping demand curve disturbs or intersects negatively sloping but flatter supply curve. Here any price above the equilibrium price would mean quantity demanded greater than quantity supplied. Thus the price will rise and move further away from the originals equilibrium level. In the following diagram the stable and unstable equilibrium situation of walras system is shown-