Ch.

8 Comparative-Static Analysis of
General-Function Models
• 8.1Differentials
• 8.2Total Differentials
• 8.3Rules of Differentials (I-VII)
• 8.4Total Derivatives
• 8.5Derivatives of Implicit Functions
• 8.6Comparative Statics of General-Function
Models
• 8.7Limitations of Comparative Statics
1
7.4 Partial Derivatives, p.167
1) y  f(x1,x 2 , ,x n ) variables x i are all independent of one another
each x can vary by itself w/o affect the other such that
2) Δy Δx1  f(x1  Δx,x 2 , ,x n ) Δx1

3) lim Δy Δx1  y  f1 partial derivative with operator  x1
Δx 0 x1
4) Y  C  I 0  G0
5) C  a  b(Y-T); (a  0; 0  b  1 )
6) T  d  tY; (d  0; 0  t  1 )
a-bd  I  G  * 1
7) Y*  Y  0
1-b  tb Go 1  b  bt
b( 1-t)(I  G)  a-bd  b( 1  t)
8) C*  C*  0
1-b  tb Go 1  b  bt
t(I  G)  ta  d( 1-b)  * t
9) T*  T  0
1-b  tb Go 1  b  bt

2
 8.1 Differentials
8.1.1 Differentials and derivatives
8.1.2 Differentials and point elasticity

3
 8.1.1 Differentials and derivatives
Problem: What if no explicit reduced-form solution exists
because of the general form of the model? Example:
What is Y / T when
Y = C(Y, T0) + I0 + G0
T0 can affect C direct and indirectly thru Y, violating the
partial derivative assumption
Solution:
• Find the derivatives directly from the original equations
in the model.
• Take the total differential
• The partial derivatives become the parameters

4
If
1) Y  C  I 0  G0
2) C  a  b(Y-T) parameter data
3) Y  a  b(Y-T)  I 0  G0
4) Y  bY  a  bT  I 0  G0
Y  a  bT  I 0  G0 1  b parameters and exog. vars mutually independent
Then

4) Y   b 1 b
T
If
1) Y  C  I 0  G0
2) C  C Y , T0 
3) Y  C Y , T0   I 0  G0 no parameter data
4) Y *  Y * T0 , I 0 , G0  assuming equil. exists
5)  
Y *  C Y * , T0  I 0  G0
6) Y*  C Y *
T0 , 
I 0 , G0 , T0  I 0  G0 exog. var (C arguments and T0 ) mutually dependent
Then

7)
 *
T0
Y ?   
problem : C Y * , T0  C Y * T0 , I 0 , G0 , T0 

5
8.1 Differentials
d
1) y  f x   lim y x derivative
dx x  0
2) y x  f x    as x  0 then   0
3) y x  f x   
4) y  f x x  x
5) y  f x x as finite x  0
6) dy  f x dx differential
where f x  is the factor of proportionality
A first - order Taylor series approximation of y1 is :
7) f x1   f x0   f x0 x1  x0 
8) y  f x0 x

6
Differential: dy & dx as finite changes (p. 180)

fi·nite
Mathematics.
a. Being neither infinite nor
infinitesimal.
b. Having a positive or negative
numerical value; not zero.
c. Possible to reach or exceed by
counting. Used of a number.
d. Having a limited number of
elements. Used of a set.

7
 Difference Quotient, Derivative &
Differential
y=f(x) f(x)

f(x0+x)
B

x
y
D f’(x)
f(x0) A f’(x0)x
C
x
x0 x x0+x
8
 Overview of Taxonomy -
Equations: forms and functions
Primitive Form

Specific General
Function
(parameters) (no parameters)

Explicit
(causation) y = a+bx y = f(x)

Implicit
(no causation) y3+x3-2xy = 0 F(y, x) = 0

9
 Overview of Taxonomy –
1st Derivatives & Total Differentials
Differentiation Form

Specific General
Function
(parameters) (no parameters)
dy  f ( x) dx
Explicit d
yb dy
(causation) dx
dx
 f ( x)

3 y 2
  
 2 x dy  2 x 2  2 y dx  0 dy  
Fx
dx
Implicit dy 
2x2  2 y  Fy
(no causation) dx


3y 2  2x  dy F
 x
dx Fy

10
 8.1.1 Differentials and derivatives

• From partial differentiation to total differentiation

• From partial derivative to total derivative using
total differentials
• Total derivatives measure the total change in y
from the direct and indirect affects of a change in
xi

11
 8.1.1 Differentials and derivatives
• The symbols dy and dx are called the differentials
of y and x respectively
• A differential describes the change in y that results
for a specific and not necessarily small change in x
from any starting value of x in the domain of the
function y = f(x).
• The derivative (dy/dx) is the quotient of two
differentials (dy) and (dx)
• f '(x)dx is a first-order approximation of dy

y  f ( x) dy  f ' ( x)dx
12
 8.1.1 Differentials and derivatives
• “differentiation”
– The process of finding the differential (dy)
• (dy/dx) is the converter of (dx) into (dy) as dx 0
– The process of finding the derivative (dy/dx) or
• Differentiation with respect to x
 dy 
Differenti al dy   dx
 dx 

Derivative
dy    dy 
 
dx   dx 
13
 8.1.2 Differentials and point elasticity

• Let Qd = f(P)
(explicit-function general-form demand equation)
• Find the elasticity of demand with respect to price

dQd   dQd



%Qd Qd  dP  m arg inal function
d    
%P dP  Qd average function
P P
elastic if  d  1, inelastic if  d  1

14
 8.2 Total Differentials

• Extending the concept of differential to smooth

continuous functions w/ two or more variables
• Let y = f (x1, x2) Find total differential dy

y y
dy  dx1  dx 2
x1 x 2
dy  f1 dx1  f 2 dx2
15
8.2 Total Differentials (revisited)
• Differentiation of U wrt x1
• U/ x1 is the marginal utility of the good x1
• dx1 is the change in consumption of good x1

dU U U dx 2 U dx n
   ... 
dx1 x1 x 2 dx1 x n dx1

dU    U 
dx1   x1  x ...x cons tan t
2 n
16
 8.2 Total Differentials (revisited)
Total Differentiation:
Let Utility function U = U (x1, x2, …, xn)

U U U
dU  dx1  dx2    dxn
x1 x 2 x n
To find total derivative
divide through by the differential dx1 ( partial total
derivative)
dU U U dx 2 U dx n
   ... 
dx1 x1 x 2 dx1 x n dx1
17
 8.2 Total Differentials
• Let Utility function U = U (x1, x2, …, xn)
• Differentiation of U wrt x1..n
• U/ xi is the marginal utility of the good xi
• dxi is the change in consumption of good xi
U U U
dU  dx1  dx2    dxn
x1 x 2 x n
• dU equals the sum of the marginal changes in the
consumption of each good and service in the
consumption function
18
 8.3 Rules of differentials,
the straightforward way

Find dy given function y=f(x1,x2)

1. Find partial derivatives f1 and f2 of x1 and x2
2. Substitute f1 and f2 into the equation
dy = f1dx1 + f2dx2

19
 8.3 Rules of Differentials
(same as rules of derivatives)
Let k is a constant function; u = u(x1); v = v(x2)
• 1.  dk = 0 (constant-function rule)
• 2. d(cun) = cnun-1du (power-function rule)
• 3. d(u  v) = du  dv (sum-difference rule)
• 4. d(uv) = vdu + udv (product rule)
• 5.  d  u   vdu  udv rule)
(quotient
 
v v2

20
 8.3 Rules of Differentials (I-VII)

6. d u  v  w  du  dv  dw

7. d(uvw) = vwdu + uwdv + uvdw

21
 Rules of Derivatives & Differentials
for a Function of One Variable
d
1) c  0 1' ) dc  0dx  0
dx
d n n 1 n n 1
2) x  nx 2' ) dx  nx dx
dx
d
3)  f x   g x   f x   g x 
dx
3' ) d  f x   g x   f x dx  g x dx
22
 Rules of Derivatives & Differentials
for a Function of One Variable
d
4)  f x g x   f x g x   f x g x 
dx
4' ) d  f x g x   f x g x dx  f x g x dx

d
5a) cx  c 5a' ) dcx  cdx
dx
d n
5b) cx  cnx n 1 5b' ) dcx n  cnx n 1dx
dx
23
 Rules of Derivatives & Differentials
for a Function of One Variable

d  f x  f x g x   f x g x 
6)   
dx  g x   g x 
2

 f x  f x g x dx  f x g x dx

6' ) d   
 g x   g x 
2

24
8.3 Example 3, p. 188:
Find the total differential (dz) of the function
x y
1) z
2x 2
x y
2) z 
2x2 2x2
z z
3) dz  dx  dy
x y
z   x y  2 x 2  4 x 2  4 xy
4)     
x x  2 x 2 2 x 2  2x 2 2
 
2x 2
2
 
2 x 2  4 x 2  4 xy x  2x  2 y
 
4x 4 2x3
z   x y    y  1
5)   2  2  2  2
y y  2 x 2x  y  2x  2x
 x  2 y  1
6) dz  dx  dy
2x3 2x2

25
8.3 Example 3 (revisited using the quotient rule for
total differentiation)

 x y
d  
1
2 x 2
d ( x  y )  ( x  y ) d ( 2 x 2
) 
2
 2x  2x 2
 
2

1

 4 2 x 2 (dx  dy )  ( x  y ) 4 xdx
4x

1

 4 2 x 2 dx  2 x 2 dy  4 x 2 dx  4 yxdx
4x

1

 4 2 x 2 dy  2 x 2 dx  4 yxdx
4x

2x2 2 x 2  4 yx
 4 dy  4
dx
4x 4x
1 x  2y
 2 dy  3
dx
2x 2x

26
 8.4 Total Derivatives

• 8.4.1 Finding the total derivative

• 8.4.2 A variation on the theme
• 8.4.3 Another variation on the theme
• 8.4.4 Some general remarks

27
 8.4.1 Finding the total derivative from the
differential
8.4.1 pp.184 - 5, Given
1) y  f x1,x2 , ,xn 
Total differential dy is equal to the sum of the partial changes in y :
y y y
2) dy  dx1  dx2    dxn
x1 x2 xn
3) dy  f1dx1  f 2 dx2  ...  f n dxn
The partial total derivative of y wrt x1 , for example,
is found by dividing both sides by dx1
dy dx2 dxn
4)  f1  f 2  fn
dx1 dx1 dx1
28
 8.4.3 Another variation on the theme
8.4.3
1) y  f x1 , x2 , u , v 
2) x1  g u , v 
3) x2  hu , v 
4) dy  f x1 dx1  f x2 dx2  f u du  f v dv total differential
dy dx1 dx2 dv
5)  f x1  f x2  fu  fv
du du du du
§y
6)  f x1 g u  f x2 hu  f u partial total derivative
§u v c

29
8.4.3 Another variation on the theme
y  f ( x1 , x2 ) x1  5u 2  3v x2  u  4v 3
dy  f1dx1  f 2 dx2 dx1  10udu  3dv dx2  du  12v 2 dv

dy  f1 10udu  3dv   f 2 du  12v 2 dv 
dy  f110udu  f1 3dv  f 2 du  f 212v 2 dv

dy   f110u  f 2 du  f1 3  f 212v 2 dv 
§y §y
 f110u  f 2 ,  f1 3  f 212v 2
§ u c v § v c u

30
 8.5 Derivatives of Implicit Functions

• 8.5.1 Implicit functions

• 8.5.2 Derivatives of implicit functions
• 8.5.3 Extension to the simultaneous-
equation case

31
 8.5.1 Implicit functions

• Explicit function: y = f(x)  F(y, x)=0 but reverse may not

be true, a relation?
• Definition of a function: each x  unique y (p. 16)
• Transform a relation into a function by restricting the
range of y0, F(y,x)=y2+x2 -9 =0

32
 8.5.1 Implicit functions
• Implicit function theorem: given F(y, x1 …, xm) = 0
a) if F has continuous partial derivatives
Fy, F1, …, Fm and Fy  0 and
b) if at point (y0, x10, …, xm0), we can construct a
neighborhood (N) of (x1 …, xm), e.g., by limiting the
range of y, y = f(x1 …, xm), i.e., each vector of x’s 
unique y
then i) y is an implicitly defined function y = f(x1 …, xm)
and ii) still satisfies F(y, x1 … xm) for every m-tuple in
the N such that F  0 (p. 195)
dfn: use  when two side of an equation are equal for any values of x and y
dfn: use = when two side of an equation are equal for certain values of x and y (p.197) 33
 8.5.1 Implicit functions
• If the function F(y, x1, x2, . . ., xn) = k is an
implicit function of y = f(x1, x2, . . ., xn), then

Fy dy  Fx1 dx1  Fx2 dx2  ...  Fxn d xn  0

where Fy = F/y; Fx1 = F/x1
• Implicit function rule
• F(y, x) = 0; F(y, x1, x2 … xn) = 0, set dx2 to n = 0

34
 8.5.1 Implicit functions
• Implicit function rule

Fy dy  Fx1 dx1  Fx2 dx2  ...  Fxn d xn  0

Fy dy   Fx1 dx1  Fx2 dx2  ...  Fxn d xn
Let dx 2  dxn  0 such that
dy y Fx1
|dxx .dxn 0  
dx1 x1 Fy

35
8.5.1 Deriving the implicit function rule (p. 197)

1) F ( y, x1 , x2 )  0
2) y  f ( x1 , x2 )
3) Fy dy  F1dx1  F2 dx2  0
4) dy  f1dx1  f 2 dx2
5) Fy  f1dx1  f 2 dx2   F1dx1  F2 dx2  0

36
8.5.1 Deriving the implicit function rule (p. 197)
6) Fy f1dx1  Fy f 2 dx2  F1dx1  F2 dx2  0
7) Fy f1  F1 dx1  Fy f 2  F2 dx2  0
8) Fy f1  F1 dx1  0
9) Fy f 2  F2 dx2  0
y F1
10) f1  
x1 Fy
y F2
11) f 2   ,
x2 Fy
37
 Implicit function problem:
Exercise 8.5-5a, p. 198
• Given the equation F(y, x) = 0 shown below, is it an
implicit function y = f(x) defined around the point
(y = 3, x = 1)? (see Exercise 8.5-5a on p. 198)
• x3 – 2x2y + 3xy2 - 22 = 0
• If the function F has continuous partial derivatives Fy, F1,
…, Fm
• ∂F/∂y =-2x2+6xy ∂F/∂x =3x2-4xy+3y2

38
 Implicit function problem
Exercise 8.5-5a, p. 198

• If at a point (y0, x10, …, xm0) satisfying the equation F (y,

x1 …, xm) = 0, Fy is nonzero (y = 3, x = 1)
• This implicit function defines a continuous function f with
continuous partial derivatives
• If your answer is affirmative, find dy/dx by the implicit-
function rule, and evaluate it at point (y = 3, x = 1)
• ∂F/∂y =-2x2+6xy ∂F/∂x =3x2-4xy+3y2
• dy/dx = - Fx/Fy =- (3x2-4xy+3y2 )/-2x2+6xy
• dy/dx = -(3*12-4*1*3+3*32 )/(-2*12+6*1*3)=-18/16=-9/8

39
 8.5.2 Derivatives of implicit functions

• Example
If F(z, x, y) = x2z2 + xy2 - z3 + 4yz = 0, then

z Fy 2 xy  4 z
  2 2
y Fz 2 x z  3z  4 y

40
 8.5 Implicit production function
• F (Q, K, L) Implicit production function
• K/L = -(FL/FK) MRTS: Slope of the isoquant
• Q/L = -(FL/FQ) MPPL
• Q/K = -(FK/FQ) MPPK (pp. 198-99)

41
 Overview of the Problem –
8.6.1 Market model
• Assume the demand and supply functions for a
commodity are general form explicit functions
Qd = D(P, Y0) (Dp < 0; DY0 > 0)
Qs = S(P, T0) (Sp > 0; ST0 < 0)

• where
Q is quantity, P is price, (endogenous variables)
Y0 is income, T0 is the tax (exogenous variables)
no parameters, all derivatives are continuous

• Find P/Y0, P/T0

Q/Y0, Q/T0
42
 Overview of the Procedure -
8.6.1 Market model
• Given
Qd = D(P, Y0) (Dp < 0; DY0 > 0)
Qs = S(P, T0) (Sp > 0; ST0 < 0)
• Find
P/Y0, P/T0,
Q/Y0, Q/T0
Solution:
• Either take total differential or apply implicit function rule
• Use the partial derivatives as parameters
• Set up structural form equations as Ax = d,
• Invert A matrix or use Cramer’s rule to solve for x/d

43
 8.5.3 Extension to the simultaneous-
equation case
• Find total differential of each implicit function
• Let all the differentials dxi = 0 except dx1
and divide each term by dx1 (note: dx1 is a choice )
• Rewrite the system of partial total derivatives of the
implicit functions in matrix notation

44
8.5.3 Extension to the simultaneous-equation case
1) F1 ( y1 , y2 , x1 )  0
2) F2 ( y1 , y2 , x2 )  0

F1 F F
3) dy1  1 dy2  1 dx1  0
y1 y2 x1
F2 F F
4) dy1  2 dy2  2 dx2  0
y1 y2 x2

F1 F F
5) dy1  1 dy2   1 dx1  0dx2
y1 y2 x1
F2 F F2
6) dy1  2 dy2  0dx1  dx2
y1 y2 x2
45
 8.5.3 Extension to the simultaneous-equation case

• Rewrite the system of partial total derivatives of the

implicit functions in matrix notation (Ax=d)
F1 dy1 F1 dy 2 F F1 dy1 F1 dy 2
7)   1 10 )   0
y1 dx1 y 2 dx1 x1 y1 dx 2 y 2 dx 2
F2 dy1 F2 dy 2 F2 dy1 F2 dy 2 F
8)   0 11 )   2
y1 dx1 y 2 dx1 y1 dx 2 y 2 dx 2 x 2

 F1 F1   dy1   F1 F1   dy1 

F
 y y 2   dx1    1   y y 2 
dx   0 
9)      x1  12 )    2    F2 
1 1

 F2 F2   dy 2     F2 F2   dy 2    x 

 y   0   y   2 
 dx
y 2   1    dx
y 2   2  
 1  1

46
7.6 Note on Jacobian Determinants
• Use Jacobian determinants to test the existence of
functional dependence between the functions /J/
• Not limited to linear functions as /A/ (special case
of /J/
• If /J/ = 0 then the non-linear or linear functions
are dependent and a solution does not exist.
F 1 F 1
y1 x1 y1 x 2 y1 y 2
J   2 2  0
y 2 x1 y 2 x 2 F F
y1 y 2 47
 8.5.3 Extension to the simultaneous-
equation case
• Solve the comparative statics of endogenous variables
in terms of exogenous variables using Cramer’s rule

 F 1
F 1

 
dy1 1  x1 y2 

dx1 J  F 2
F 2

 
 x1 y2 
48
 8.6 Comparative Statics of General-
Function Models
• 8.6.1 Market model
• 8.6.2 Simultaneous-equation
approach
• 8.6.3 Use of total derivatives
• 8.6.4 National income model
• 8.6.5 Summary of the procedure

49
 Overview of the Problem –
8.6.1 Market model
• Assume the demand and supply functions for a
commodity are general form explicit functions
Qd = D(P, Y0) (Dp < 0; DY0 > 0)
Qs = S(P, T0) (Sp > 0; ST0 < 0)

• where
Q is quantity, P is price, (endogenous variables)
Y0 is income, T0 is the tax (exogenous variables)
no parameters, all derivatives are continuous

• Find P/Y0, P/T0

Q/Y0, Q/T0
50
 Overview of the Procedure -
8.6.1 Market model
• Given
Qd = D(P, Y0) (Dp < 0; DY0 > 0)
Qs = S(P, T0) (Sp > 0; ST0 < 0)
• Find
P/Y0, P/T0,
Q/Y0, Q/T0
Solution:
• Either take total differential or apply implicit function rule
• Use the partial derivatives as parameters
• Set up structural form equations as Ax = d,
• Invert A matrix or use Cramer’s rule to solve for x/d

51
 General Function Comparative Statics:
A Market Model (8.6.1)
Let the demand and supply functions for a commodity be :
1) Qd  DP, Y0  ( DP/  0; DY/0  0)
2) Qs  S P, T0  ( S P/  0; ST/0  0)
Where Y0 is income and T0 is the tax on the commodity.
All derivative continuous .
Endogenous : Q, P
Exogenous :Y0 , T0
Parameters : D, S are functions of P, Y0 , and T0
3) F 1(P, Q; Y 0 , T0 )  D(P , Y0 ) – Q  0
4) F 2(P, Q; Y 0 , T0 ) S(P , T0 ) – Q  0 52
 General Function Comparative Statics: A
Market Model
3) D( P , Y0 )  Q  0
4) S ( P , T0 )  Q  0
Find dQ* dY0 , dQ* dT0 , dP * dY0 , dP* dT 0
Take the total differenti al of equations (3) & (4) ;
5) DP/ dP  DY/0 dY0  dQ  0
6) S P/ dP  ST/0 dT0  dQ  0
Put only endog. vars on left
7) DP/ dP  dQ   DY/0 dY0
8) S P/ dP  dQ   ST/0 dT0
53
 General Function Comparative Statics: A
Market Model

7) DP/ dP  dQ   DY/0 dY0

8) S P/ dP  dQ   ST/0 dT0
Put equations (7) & (8) in matrix format ( Ax  d );
 DP/  1  dP   DY/0 0  dY0 
9)  /     /  
S
 P  1 d Q
   0  S T 0  dT0

Calculate the sign of the Jacobian det .

DP/ 1
10) J   S P/  DP/  0
S P/ 1
54
General Function Comparative Statics: A Market Model
 DP/  1  dP   DY/0 0  dY0 
11)  /     /  
S
 P  1 d Q
   0  S T 0  dT0

Take the partial  total derivatives of equation (11)

wrt exogenous var s dY0 and dT0
 dP 
 DP/  1  dY0   DY/0 
12)  /   dQ    
 SP  1    0 
 dY 
 0
 dP 
 DP/  1  dT0   0 
13)  /   dQ     S / 
 SP  1    T0 
 dT 
 0
55
General Function Comparative Statics: A Market Model
 DP/  1  dP   DY/0 0  dY0 
11)  /     /  
S
 P  1 d Q
   0  S T 0  dT0

Take the partial  total derivatives of equation (11)

wrt exogenous var s dY0 and dT0
 dP 
 DP/  1  dY0   DY/0 
12)  /   dQ    
S
 P  1    0 
 dY 
 0
Solve for the vectors of endogenous derivatives by
inverting the A matrices of equations 12
 dP 
1  1 1   DY/0   dY0 
13) /  S / /     dQ ;
S P  DP/  P DP   0   
 dY 
 0
56
 General Function Comparative Statics: A Market Model

 dP 
1  1 1   DY/0   dY0 
13) / /  / /     dQ 
S P  DP   S P DP   0   
 dY 
 0
Solve equations 13 for the endogenous derivatives;
Calculate the sign of the derivatives
( DP/  0; DY/0  0) ( S P/  0; ST/0  0)
DP/ 1
J   S P/  DP/  0
S P/ 1
dP DY/0 dQ S P/ DY/0
14)  / /
 0; 15)  / /
 0; ;
dY0 S P  DP dY0 S P  DP

57
General Function Comparative Statics: A Market Model

 dP 
1  1 1   0   dT0 
16) / /  /  /  
 
S P  DP  S P DP   ST0   dQ 
/

 dT 
 0
Solve equations 16 for the endogenous derivatives;
Calculate the sign of the derivatives
( DP/  0; DY/0  0) ( S P/  0; ST/0  0)
DP/ 1
J   S P/  DP/  0
S P/ 1
/ / /
dP  ST0 dQ  DP ST0
17)  / /
 0; 18)  / /
0
dT0 S P  DP dT0 S P  DP

58
 Market model comparative static solutions by
Cramer’s rule
D D

D P Y0
 1
Y0 D S S D
0
dP 0  1 Y0 dQ P Y0
13)    0; 14)  P  0
dY0 J J dY0 J J
13' ) An increase in income (Y0 ) causes an increase in equilibriu m price paid .
14' ) An increase in income causes an increase in equilibriu m quantity consumed .
D
0
0 1 P
S S S S D S
 1   
dP T0 T0 dQ P T0 P T0
15)    0; 16)   0
dT0 J J dT0 J J
15' ) An increase in taxes (T0 ) causes an increase in equilibriu m prices paid
16' ) An increase in taxes causes a decrease in equilibriu m quantity consumed

59
 Market model comparative static solutions by
matrix inversion
 dP  D S D
1  1 1   D   dY  dP Y0 dQ P Y0
13)  S D   Y0    0 ; 14)   0; 15)  0
J  P  
P   0  
dQ  dY0 J dY0 J
 dY 
 0
14' ) An increase in income (Y0 ) will cause an increase in equilibrium price paid .
15' ) An increase in income will cause an increase in equilibrium quantity consumed.
 dP  S D S
1  0     
1  1  S dT dP T0 dQ P T0
16)  S D    0 ; 17)   0; 18)  0
J   d Q dT0 J dT0 J
 P P   T0   

 dT0 
17' ) An increase in taxes (T0 ) will cause an increase in equilibrium prices paid
18' ) An increase in taxes will cause a decrease in equilibrium quantity consumed

60
8.7 Limitations of Comparative Statics

• Comparative statics answers the question:

how does the equilibrium change w/ a
change in a parameter.
• The adjustment process is ignored
• New equilibrium may be unstable
• Before dynamic, optimization

61