Comparative Statics

Comparative Statics:

The prime purpose of economic theories is to derive interesting hypotheses. In the context of market equilibrium economists assume that we start from equilibrium and when a “shock” occurs. A shock is an unanticipated change in an environmental (or exogenous) variable, which disturbs the initial equilibrium. Consumers and/or producers may now change their demand/supply and a new equilibrium will result. The adjustment period between the two equilibrium may be drawn out over time (i.e., a relatively long period with excess demand or supply), but eventually a new equilibrium will return. “Comparative statics” refers to comparisons between (static) equilibrium, i.e., we disregard the adjustment that takes place in between. For example, if the price malt increases to pm = 2kr, the supply curve will shift upwards to:

Q′S = 27 + 3 x p − 2 x 2 − 0.05 x100
= 18 + 3p

Since “the law of demand” tells us that the demand curve is downward sloping we hypothesize that the market price will increase and the quantity demanded will decrease:

QD = Q′S

70 – 2. p = 18 + 3. p
p∗ = 52/5 = 10.4
Q∗ = 70 − 2 x 10.4 = 49.2

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