Answer to Question #227972 in Microeconomics for Graylin Lapi

Question

Why do economists undertake comparative statics analysis? What role do endogenous variables and exogenous variables play in comparative statics analysis?

Answer 1

Comparative statics analyses are undertaken to determine how the levels of endogenous variables change as some exogenous variable is changed. This type of analysis is important since in the real world the exogenous variables such as weather and policy tools do change and it is useful to know how changes in these variables affect the levels of other endogenous variables. A good example of comparative static analysis would be asking the question: If low rainfall( an exogenous variable) causes a 25% reduction in corn supply, by how much will market price for corn( an endogenous variable) increase?