Comparative statics

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Definition

Comparative statics is the comparison of two different scenarios (and the outcomes in these scenarios) that differ in terms of a change in an exogenous parameter, i.e., a parameter that is part of the backdrop.

Examples

Shifts in the demand and supply curve and their effect on the equilibrium price

The demand curve for a good, service or commodity is a plot of price and demand, and the supply curve is a plot of price and supply. Juxtaposing these curves gives a point of intersection, which is the equilibrium price, also termed the market-clearing price or market price. At this price, demand equals supply and there is no tendency to deviate from this price.

If, however, one of the other determinants of demand (such as the price of substitute goods, price of complementary goods, expectations about future prices, income, and preferences) changes, then this might cause a change in the shape of the demand curve. Similarly, if one of the other determinants of supply (such as the costs of various factors of production, the efficiency of the production process which in turn depends on technology, a change in the laws and regulations, the entry of new producers) changes, then this might change the shape of the supply curve. In either case, the equilibrium price may be affected. These external determinants of demand and supply are the exogenous parameters, and comparative statics addresses the question of how changes in these parameters affect the shape of the curve, and the equilibrium price and quantity.