What is a self-confirming equilibrium? Use the supply/ demand model to demonstrate how the expec

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What is a self-confirming equilibrium? Use the supply/...

Key Concepts

Market Expectations

Market expectations refer to what economic agents anticipate regarding future market conditions, such as prices. In the context of a self-confirming equilibrium, if agents expect lower prices, their collective behavior—such as reducing demand or the corresponding adjustments in supply—can lead to outcomes that confirm these expectations. This feedback loop helps sustain the equilibrium, even if the initial expectation was based on incomplete or indirect information.

Self-confirming Equilibrium

A self-confirming equilibrium is a state in a game or economic model where each agent's beliefs are accurate along the paths of play they experience, even if they are mistaken off the equilibrium path. In this situation, agents’ decisions are optimal based on their beliefs, and those beliefs are subsequently confirmed by the observable outcomes, even though the agents might have incomplete or incorrect information about other aspects of the environment.

Supply and Demand Model

The supply and demand model is a fundamental framework in economics that describes how the price and quantity of goods are determined in a competitive market. The model illustrates the interaction between consumers' demand for a product and producers' supply of the product, with the equilibrium price being the point where quantity supplied equals quantity demanded.

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