Transcript Question: Comparative Statics

Lecture 6
Comparative Statics Methodology
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“Comparative statics” mean comparing static (stationary)
equilibria, before and after
The method…
– Begin in equilibrium … always!
– Change ceteris paribus condition(s)
– Determine effect(s) on demand/supply
– Examine incentives of competitors
 Excess demand or supply?
 How will price move
– End in new equilibrium…always!
Start in equilibrium…
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Initial values of ceteris paribus conditions determine
– Initial position of demand and supply curves, and thus
– Initial equilibrium values of P* and Q*
S (w, t, z)
D (Ps, Pc, I, X)
An increase in demand
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Could be caused by:
Higher Ps
Lower Pc
Higher income if
normal good
Lower income if
inferior good
The results:
Higher P and Q
A decrease in demand
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Could be caused by:
Lower Ps
Higher Pc
Lower income if
Normal good
Higher income if
inferior good
The results:
Lower P and Q
A decease in supply
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Could be caused by:
Higher input prices
Degradation in
technology
Other changes
that raise costs
The results:
Higher P and
lower Q
An increase in supply
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Could be caused by:
Lower input prices
Improvement in
technology
Other changes
that lower costs
The results:
Lower P and
higher Q
Unclear:
What happens if BOTH demand and supply
change?
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Consider new trucking safety regulations in U.S.
– Costs of production forced up, so reduced supply
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Tends to push price up, quantity down
– But, if shipping is better, then higher demand
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Tends to push price up, quantity down
– Both push price up, thus higher equilibrium price
– Opposing effects on quantity, thus unclear effects on
equilibrium quantity without more information
– Questions: What substitutes are affected by this? What
complements are affected by this.
Another case
AIDS and the labor market in Africa
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AIDS may kill 20% of the population in some African countries
– If it does, that reduces the supply of labor
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This tends to push price up, quantity down
– Quantity demanded of labor declines as price of labor rises and
demand for labor may fall if employers afraid to operate there
due to risk posed by disease
– Both push quantity down, thus lower equilibrium quantity
– Opposing effects on price, so unclear change in equilibrium price,
without more information
Question: Comparative Statics
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In the summer in the U.S., more
gasoline and more tomatoes are
bought than during other times of the
year. The price of gasoline rises; the
price of tomatoes fall. Why do these
prices move in opposite directions?
Question: Comparative Statics
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In the 1800s in England, when there
were bad harvests and the supply of
food was lower, rich people who were
worried about the poor people having
enough food to eat would buy large
amounts of the crops and sell them to
poor people at low prices.
– Did the poor get more food?
– Were the poor made better off by rich?
– Did anyone else care?
Question: Comparative Statics
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Suppose consumers think the price of
beef is too high.
Consumer “advocates” urge
consumers to stop buying beef to
punish the sellers and force them to
lower the price.
– This, it is said will enable consumers to
afford the beef they want.
– Is that logic correct?
Question: Comparative Statics
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The political relationship between the
U.S. and Saudi Arabia has worsened
since the terrorist attacks occurred
and problems in Israel grew. Saudi
billionaires began to pull their money
out of the U.S. stock market and other
investments. This has caused concern
that the U.S. economy will be hurt by
the reduction in the supply of
investment funds. True?
Comparative Statics ?
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Suppose—perhaps because of
localized global cooling-- North African
countries begin to grow much more
cotton than they do now. What will be
the likely effects?
Question: Comparative Statics
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Sheep supply both wool and mutton.
Suppose—perhaps due to a sudden
scare over Mad Sheep Disease—
people suddenly refuse to eat mutton.
What will happen in the sheep
market? (Assume the demand for
wool does not change)
Comparative Statics ?
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Slavery is common in the Sudan. There are estimated
to be 100,000 slaves, used as domestic servants. Most
of the slaves come from African tribes in the southern
Sudan. Slave traders capture them and take them to
the Arab northern part of Sudan. Market price is about
$50 per slave. Anti-slave groups buy slaves their
freedom and return them home. How does that affect
the market for slavery?