The financial encyclopedia uses cookies to improve your user experience. Find out more here!




Comparative static equilibrium analysis


A method of analysis in economics. We begin by examining the equilibrium of the subject of study - the individual consumer, the market, the economy, etc. One of the underlying determinants of this equilibrium is then changed and the resulting new equilibrium eicamined. The new equilibrium position is then compared to the previous equilibrium position, and from this the effects of the change deduced. For example: in a study of the market for a particular good, the initial equilibrium price and quantity traded are determined by the equality of supply and demand. The underlying determinants of this equilibrium are such factors as the leve!of buyers' income, their tastes, prices of other products, technology and prices of factors of production, and if one of these changes
- the supply curveor the demand curve will shift. Suppose that there is a rise in buyers' incomes. This will (unless the good is an inferior good) lead to an increase in demand at every price. This will cause price to rise and the quantity supplied to increase, until the market is again in equilibrium. By comparing the new equilibrium with the initial one we can predict that the effect of a rise in buyers' incomes is to raise price and increase the quantity bought and sold. The same technique could have been used for a change in any other underlying determinant.

The word 'comparative' is due to the fact that we compare two equilibrium positions. The word 'static' is due to the fact that they are static equilibrium positions, i.e. in the absence of any change in the underlying determinants the equilibrium positions would be maintained for all time: there is no built-in process of time-related change in the model.

Note that to be able to apply this kind of analysis we first have to assure ourselves that the system under study does move to an equilibrium position after some change. Also, the method of analysis tells us nothing about the behaviour of the system between the two equilibrium positions or how long it takes to move from one equilibrium to another - for this we need a dynamic analysis.

Reference: The Penguin Dictionary of Economics, 3rd edt.