What is knife-edge equilibrium in economics?

Question

What is knife-edge equilibrium in economics?

Answer 1

It is an equilibrium sustained only when a certain condition holds. The "knife-edge" is what the condition is referred to when it is arbitrary (no forces leading to that condition) and if it fails to hold by only a *slight* bit, the equilibrium falls apart.

Answer 2

Knife-edge equilibrium is an unstable equilibrium. If that equilibrium is reached, you may continue to stay in that equilibrium in the absence of any slightest shock or disturbance. Once such a small disturbance, moves the system away from the equilibrium, the system cannot ensure automatic return to the same equilibrium. Thus the underlying forces do not restore back to the original equilibrium by self correcting process. For example if you have both the demand and supply curves negatively sloped, you can have an equlibrium in the market if the price happens to be the same as the price at which these curves intersect. But if the price deviates from that equlibrium price for some reason, the demand supply adjustments will not lead the system back to the equlibrium.Try doing that. An excess supply at a price different from the equlibrium price will continue to lead to a fall in price and further increase excess supply.