Comparative statics is a method in economics that consists of comparing two equilibrium points. It is used to contrast two situations, one before and one after the modification in a variable external to the analyzed model.
That is, if we refer, for example, to the supply and demand of a product, the variation in price and quantity sold is calculated. This is based on something exogenous such as a change in the market structure from perfect competition to a monopoly.
In a competitive market, the equilibrium point results from matching demand to supply. However, when there is only one supplier, marginal cost must be equated with marginal revenue. The difference between the two scenarios can be seen in the following image:
It should be noted that comparative statics does not stop to investigate in detail how to go from one equilibrium to another. Just contrast the beginning with the end result.
History of comparative statics
The history of comparative statics dates from the beginnings of economics. It is credited as its precursor to David Hume who in 1752 studied how an increase in gold reserves impacted prices.
Later, comparative statics began to appear graphically from 1870. However, it was only formalized by John Hicks in his 1939 book “Value and Capital”. Likewise, Paul A. Samuelson did in “Fundamentals of economic analysis. ”From 1947.
Comparative statics functions
Comparative statics is very useful for microeconomics, to evaluate how different markets work. However, it is also useful for macroeconomics, especially to know how they affect monetary and fiscal policy decisions. For example, the effects of an increase in the money supply by the central bank can be analyzed.
It should also be noted the simplicity of this method, by leaving aside the process by which each equilibrium is reached. Likewise, it is characterized by being hypothetical-deductive, since laws are inferred from a restricted number of theories and principles. Among the latter, for example, profit maximization stands out as a necessary condition in running a business.
However, we must also take into account the limits of comparative statics. When contrasting two situations in isolation, great care must be taken in establishing causality. That is, it must be considered if one or more variables have impacted.
In addition, another key aspect that comparative statics does not study is the speed at which one passes from one equilibrium to another.