Questions: Comparative Statics

Question 1

A student explains the downward slope of the aggregate demand curve by saying: 'When the price level falls, goods are cheaper, so households buy more.' A comparative-statics question asks: 'New oil reserves are discovered, lowering production costs. Simultaneously, consumer confidence rises.' What is the unambiguous prediction from comparative statics?

• A. Price rises and quantity is ambiguous
• B. Price falls and quantity is ambiguous
• C. Quantity rises and price is ambiguous
• D. Both price and quantity rise unambiguously

Answer: (C)

The oil discovery shifts supply rightward (lower costs → more supplied at every price). Rising consumer confidence shifts demand rightward (consumers want more at every price). Both shifts increase equilibrium quantity — that effect is unambiguous. But supply increasing pushes price down while demand increasing pushes price up; which effect dominates depends on the magnitudes, so price is ambiguous. In double-shift comparative statics, you can always pin down one variable but not both without magnitude information.

Question 2

Using comparative statics, what happens to equilibrium price when supply increases and demand stays constant?

• A. Price rises — more supply signals higher production costs, which pass through to consumers
• B. Price falls — the supply increase shifts the curve right, moving the intersection to a lower price
• C. Price is ambiguous — without knowing demand elasticity we cannot determine the direction
• D. Price stays the same — price is determined only by demand, not supply

Answer: (B)

With demand fixed, a rightward shift in supply moves the intersection down along the demand curve: price falls and quantity rises. This is unambiguous — there is only one curve shifting, so both the direction of price and quantity changes are determinate. The temptation to invoke elasticity is misplaced here: elasticity determines the *magnitude* of the change (how much prices fall), not its direction. Comparative statics always gives a definite directional answer for single-curve shifts.

Question 3

Comparative statics can be used to determine the path or speed by which an economy adjusts from one equilibrium to another after a shock.

• T. True
• F. False

Answer: False

Comparative statics compares two equilibria — the 'before' state and the 'after' state — without saying anything about how the economy gets from one to the other. It is a purely logical exercise: given that the curve shifts, what is the new intersection? Questions about adjustment speed, out-of-equilibrium dynamics, or whether markets clear quickly or slowly require dynamic analysis, not comparative statics. The name 'statics' reflects this: we compare two static snapshots, not a dynamic process.

Question 4

When both supply and demand shift simultaneously, comparative statics can always determine the direction of change in at least one equilibrium variable.

• T. True
• F. False

Answer: True

In a double-shift scenario, one variable's direction is always determinate. If both curves shift in ways that push a variable in the same direction (e.g., both a demand increase and supply increase push quantity up), that variable is unambiguous. The other variable receives conflicting pressure and is ambiguous. It is impossible for both price and quantity to be simultaneously ambiguous in a standard supply-demand model — the geometry of intersecting curves ensures at least one variable is pinned.

Question 5

Why is the outcome for one equilibrium variable sometimes 'ambiguous' in a comparative statics exercise involving simultaneous shifts in both supply and demand? What information would resolve the ambiguity?

Model answer: When both curves shift, each shift independently affects price and quantity in known directions. One variable receives consistent pressure (both shifts push it the same way), making it determinate. The other variable receives conflicting pressure — one shift pushes it up, the other pushes it down. The net direction depends on which shift is larger in magnitude. To resolve the ambiguity, you would need to know the sizes of the shifts and the slopes (elasticities) of the curves.

For example, if both demand and supply increase, quantity unambiguously rises. But price: demand increase pushes price up, supply increase pushes price down. If the demand shift is larger, price rises; if the supply shift is larger, price falls. Without that magnitude information, we correctly report the outcome as 'ambiguous' — this is not an evasion but the logically honest answer. Students who refuse to report ambiguity and instead guess a direction are overclaiming what the model can tell us.