Lecture 6 Comparative Statics “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… P P* Q* 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’, so now what? Has Demand changed? Has Supply P S P* P’ 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 The results: Higher P and Q P S P2 P1 D2 D1 Q1 Q/time Q2

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 The results: Lower P and Q P S P1 P2 D1 D2 Q2 Q/time Q1

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 The results: Higher P and lower Q S2 P S1 P2 P1 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 The results: Lower P and higher Q S1 P S2 P1 P2 D Q1 Q2 Q/time

Question: Comparative Statics 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 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 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.)