1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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.

9. 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?

10. 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.)