Lecture 6 Comparative Statics Methodology

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Lecture 6Comparative Statics Methodology

• 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 equilibriumalways!

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Start in equilibrium

• Initial values of ceteris paribus conditions
  determine
• 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
3
An increase in demand

• Could be caused by
• Higher Ps
• Lower Pc
• Higher income if
• normal good
• Lower income if
• inferior good
• The results
• Higher P and Q

P
S
P
D2
D1
Q
Q/time
4
A decrease in demand

• Could be caused by
• Lower Ps
• Higher Pc
• Lower income if
• Normal good
• Higher income if
• inferior good
• The results
• Lower P and Q

P
S
P
D1
D2
Q
Q/time
5
A decease in supply

• Could be caused by
• Higher input prices
• Degradation in
• technology
• Other changes
• that raise costs
• The results
• Higher P and
• lower Q

S2
P
S1
P
D
Q
Q/time
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An increase in supply

• Could be caused by
• Lower input prices
• Improvement in
• technology
• Other changes
• that lower costs
• The results
• Lower P and
• higher Q

S1
P
S2
P
D
Q
Q/time
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UnclearWhat happens if BOTH demand and supply
change?

• Consider new trucking safety regulations in U.S.
• Costs of production forced up, so reduced supply
• Tends to push price up, quantity down
• But, if shipping is better, then higher demand
• 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.

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Another caseAIDS and the labor market in Africa

• AIDS may kill 20 of the population in some
  African countries
• If it does, that reduces the supply of labor
• 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

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Question Comparative Statics

• 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?

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Question Comparative Statics

• 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?

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Question Comparative Statics

• 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?

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Question Comparative Statics

• 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?

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Comparative Statics ?

• Supposeperhaps because of localized global
  cooling-- North African countries begin to grow
  much more cotton than they do now. What will be
  the likely effects?

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Question Comparative Statics

• Sheep supply both wool and mutton.
• Supposeperhaps due to a sudden scare over Mad
  Sheep Diseasepeople suddenly refuse to eat
  mutton. What will happen in the sheep market?
  (Assume the demand for wool does not change)

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Comparative Statics ?

• 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?