Classifying Comparative Statics
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There are a limited number of comparative statics to study: the demand
curve shifts outward; the demand curve shifts inward; the supply curve
shifts inward; or the supply curve shifts outward.
The bidding mechanism works differently in each situation to change the
competitive equilibrium.
A demand curve can shift outward for
the following reasons:
1. The price of a substitute good
increases.
2. The price of a complementary good
decreases.
3. Income increases (if bread is a
normal good).
4. There are expectations of future
higher prices for bread.
5. Population or number of buyers in
the market increases.
On the left, the demand curve has
shifted outward to D'. The new
equilibrium price has increased to
$2.50 per loaf, and the new equilibrium
quantity has increased to six loaves of
bread.
The reasons for the demand curve to
shift inward are directly opposite of the
events that caused it to shift outward.
You should work through each of the
events in the previous case, but in the
opposite direction. Be sure to review
why the bidding mechanism operates
in the direction that it does.
In the example on the left, the demand
curve has shifted inward, decreasing
the equilibrium price and quantity.
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1172.doc –rev 11/07/2006
A supply curve can shift inward for the
following reasons:
1. The prices of input goods increase.
2. Technology in the industry worsens.
3. The number of sellers decreases.
The bidding process forces the market
equilibrium price up and the quantity
down, as on the left.
The final comparative static situation
occurs when the supply curve shifts
outward. The reasons for this outward
shift are directly opposite of the
reasons that caused it to shift inward.
The bidding process causes prices to
fall and the quantity to increase.
The chart on the left summarizes all of
the cases in comparative statics.
Because there are only four possible
cases, you should work through the
logic of each. Focus on what causes
each and the logic of the bidding
process.
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Copyright ã 2006, Thinkwell Corp. All Rights Reserved.
1172.doc –rev 11/07/2006