Transcript 06--Comparative Statics

Lecture 6
Comparative Statics
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“Comparative statics” mean comparing static (stationary)
equilibria, before and after
The method…
– Begin in equilibrium
– Change ceteris paribus condition(s)
– Determine effect(s) on demand/supply
– Examine incentives of competitors
 Excess demand or supply?
 How will price move?
– Move to new equilibrium
Start in equilibrium…

Initial position of demand and supply curves, and thus
initial equilibrium values of P* and Q*
P
S (w, t, z)
P*
D (Ps, Pc, I, X)
Q*
Q/time
Suppose there is a change in Price

Initial position of demand and supply curves, and initial
equilibrium values of P* and Q* Now price falls to P’.
Lower price means greater quantity demanded, Qd’,
and smaller quantity supplied, Qs’,
P
so now what?
S
Has Demand
changed?
Has Supply
P*
P’
changed?
D
Qs’ Q* Qd’
Q/time
An Increase in Demand:
A Shift from D1 to D2

Could be caused by:
Higher Ps,
Lower Pc,
Higher income if
normal good,
Lower income if
inferior good
P
S
P2
P1
D2
The results:
Higher P and Q
D1
Q1
Q2
Q/time
A Decrease in Demand:
A Shift from D1 to D2

Could be caused by:
Lower Ps,
Higher Pc,
Lower income if
normal good,
Higher income if
inferior good
P
S
P1
P2
D1
The results:
Lower P and Q
D2
Q2
Q1
Q/time
A Decrease in Supply:
A Shift from S1 to S2

Could be caused by:
Higher input prices,
Reduction in
Technology,
Some suppliers
leave the market,
or other changes
that raise costs
S2
P
S1
P2
P1
The results:
Higher P and
lower Q
D
Q2
Q1
Q/time
An Increase in Supply:
A Shift from S1 to S2

Could be caused by:
Lower input prices,
Improvement in
Technology,
More competitors
enter the market,
Other changes
that lower costs
S1
P
S2
P1
P2
The results:
Lower P and
higher Q
D
Q1
Q2
Q/time
Question: Comparative Statics
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Coke and Pepsi compete with each
other.
Some years ago Coke decided to raise
the price of Coke by 25%.
Work through the impact of that event
on the market for Pepsi.
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?
Comparative Statics
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Suppose North African farmers begin
to grow much more cotton than they
do now. What will be the likely
effects? (Work through likely effects
on supply and demand and think of
effects on substitutes and
complements.)