Comparative Statics

Comparative statics is a field of study that examines how changes in market conditions influence the positions of the demand and supply curves and therefore the equilibrium levels of price and output (see Santerre, 2000).

Comparative statics involves comparing the initial and new equilibrium points after an external change alters the market. This tool can therefore be used to explain the effects of market changes in the past or to forecast future market outcomes. For example, suppose the market for physician services in Chicago is initially in equilibrium. Then a local economic boom increases average consumer income by $1,000 per year. The quantity of physician services demanded at every given price rises, shifting the demand curve for physician services to the right. At the original equilibrium price, the quantity demanded of physician services exceeds the number of visits physicians are willing to supply. Patients bid up the price of physician visits, which gives physicians an incentive to increase the number of visits provided. This process continues until the market price and quantity of visits reach the intersection of the original supply curve and the new demand curve. Thus, comparative statics predicts that a higher price and number of physician visits are associated with an increase in consumer income.

Figure 1 Comparative Statics