5 Comparative Statics

Question 1

What does market clearing price mean?

Answer 1

All the goods which people are willing to offer at that price get sold to people who are willing to buy them at the price.

Question 2

Will markets always find their equilibrium?

Answer 2

Question 3

What is ‘the forward problem’? What is ‘the inverse problem’?

Answer 3

Forward problem: given a theoretical model what are the implication for observables?

theory → data

Inverse problem: given the observables what are the implications for the theoretical model?

data → theory

Question 4

What is meant by comparative statics?

Answer 4

Given descriptions of demand and supply, we can find the equilibrium price and quantity by setting q_D = q_S.

Then, by changing things, find a new equilibrium.

This method is comparative statics.

Question 5

Suppose: q_D = 90 - 5p and q_S = 4p

What is the price and quantity goods are traded at?

Answer 5

Question 6

Suppose: q_D = 90 - 5p and q_S = 4p

Equilibrium price = 10, equilibirum quantity = 40

What are the elasticities of demand and of supply at equilibrium?

Answer 6

Question 7

Suppose: q_D = 90 - 5p and q_S = 4p

Equilibrium price = 10, equilibirum quantity = 40

What are the surpluses?

Answer 7

Question 8

How can we find the inverse demand curve from q_<em>D</em> = a + bp?

Answer 8

Question 9

How can we find the inverse supply curve from q_S = c + dp?

Answer 9

Question 10

Key characteristics of competitive equilibrium and Pareto efficiency?

Answer 10

Pareto efficiency occurs when all possible trade which could be made are actualised, because of gains of trade incentives.

You could, in principle, arrange a Pareto efficient distribution, but this might be tricky in practice.

Competitive equilibrium does this for you - a free-for-all which miraculously ends up providing this (well… often?)

Question 11

What are other arguments for the primacy of market mechanisms? (and lil criticisms)

Answer 11

Entailing and promoting “freedom”.

Voluntary participation in markets is certainly important.

But this notion of freedom is the same which lies behind the advice: “if you can’t afford your dinner, you’re free to go without.”

Pareto optimality

What constitutes “the common good” is that which enjoys common assent.

Pareto optimality is important, but not inviolable. It may conflict with other notions of “good society”, like freedom of choice…