Chapter 26 Principles of Market Adjustment and Stability First market prices can exhibit the type of instability predicted by classical dynamic models. Second the conditions under which instability is observed are not captured by the cobweb model but such conditions are captured by models of the form developed by Marshall and Walras in which the market has perversely shaped curves such as an upward sloped demand or downward sloped supply. Third the appropriate model Marshall or Walras depends on properties of the underlying demand and supply. If the special shape is due to the existence of an externality such as a fad or a Marshallian external economy then experiments have demonstrated that the Marshallian model is the appropriate model. If the special shape is due to income effects then the appropriate model is the Walrasian model and not the Marshallian model. That is if the special shape is due to income effects such as Giffen goods or a backward bending supply of labor then the Walrasian model reﬂects the appropriate principles. In summary the mystery of the price discovery process is solved in part by classical models of adjustment.