Comparative Statics: A Predict-and-Compare Toolkit
Comparative statics is the skill of predicting how the market’s equilibrium price and quantity change after a shock (a change in conditions). The core idea is simple: treat the initial equilibrium as a baseline, apply one or more curve shifts, then compare the old and new intersections.
The 4-Step Method (Use Every Time)
- Identify the shock: What changed in the world (policy, weather, technology, incomes, expectations, input costs)?
- Decide which curve shifts: Demand shifts if buyers’ willingness to pay changes; supply shifts if sellers’ willingness to sell at each price changes.
- Shift the curve: Right = increase; left = decrease. Keep the other curve fixed unless the shock affects it too.
- Compare old vs new equilibrium: Read the direction of change in price and quantity from the new intersection.
Rule of thumb: With a single curve shift, both price and quantity move in predictable directions. With two shifts at once, one variable can become ambiguous.
One-Sentence Justification Template (Required)
Use this sentence format for every prediction: Because [shock] shifts [demand/supply] [left/right], the equilibrium [price] [rises/falls/ambiguous] and [quantity] [rises/falls/ambiguous].
Case Set A: Demand Shifts (Supply Held Fixed)
In these cases, assume supply does not shift. Your job is to shift demand and compare equilibria.
A1) Demand Increases (Demand Shifts Right)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Demand shifts right (D → D') |
| Price effect | Price rises |
| Quantity effect | Quantity rises |
| Real-world interpretation | Buyers compete more strongly for the product at each price |
Applied scenario: Housing (city becomes more attractive)
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- Shock: A major employer opens a campus, bringing high-income workers.
- Prediction task: What happens to average rent (price) and occupied units (quantity) in the rental market?
- Your one-sentence justification: (Write it using the template.)
Applied scenario: Gasoline (driving demand rises)
- Shock: A holiday travel surge increases miles driven.
- Prediction task: What happens to gasoline price and gallons sold?
- Your one-sentence justification: (Write it using the template.)
Applied scenario: Seasonal produce (social media trend)
- Shock: A viral recipe increases demand for avocados.
- Prediction task: What happens to avocado price and quantity sold this week?
- Your one-sentence justification: (Write it using the template.)
A2) Demand Decreases (Demand Shifts Left)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Demand shifts left (D → D') |
| Price effect | Price falls |
| Quantity effect | Quantity falls |
| Real-world interpretation | Buyers are less willing to pay at each price |
Applied scenario: Housing (remote work reduces city demand)
- Shock: Many firms adopt permanent remote work, reducing the need to live near downtown.
- Prediction task: What happens to rent and occupied units?
- Your one-sentence justification: (Write it using the template.)
Applied scenario: Gasoline (fuel-efficient cars)
- Shock: A rapid shift toward fuel-efficient vehicles reduces gasoline consumption at any given price.
- Prediction task: What happens to gasoline price and gallons sold?
- Your one-sentence justification: (Write it using the template.)
Case Set B: Supply Shifts (Demand Held Fixed)
In these cases, assume demand does not shift. Your job is to shift supply and compare equilibria.
B1) Supply Increases (Supply Shifts Right)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Supply shifts right (S → S') |
| Price effect | Price falls |
| Quantity effect | Quantity rises |
| Real-world interpretation | Sellers can produce more at each price (lower costs or better technology) |
Applied scenario: Seasonal produce (good weather harvest)
- Shock: Ideal weather increases strawberry yields.
- Prediction task: What happens to strawberry price and quantity sold?
- Your one-sentence justification: (Write it using the template.)
Applied scenario: Housing (construction productivity)
- Shock: Modular construction lowers building costs and speeds completion.
- Prediction task: What happens to rent (or home prices) and housing units supplied?
- Your one-sentence justification: (Write it using the template.)
B2) Supply Decreases (Supply Shifts Left)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Supply shifts left (S → S') |
| Price effect | Price rises |
| Quantity effect | Quantity falls |
| Real-world interpretation | Sellers face higher costs or constraints, so less is offered at each price |
Applied scenario: Gasoline (refinery outage)
- Shock: A major refinery shuts down unexpectedly.
- Prediction task: What happens to gasoline price and gallons sold?
- Your one-sentence justification: (Write it using the template.)
Applied scenario: Seasonal produce (frost damage)
- Shock: A frost destroys part of the lettuce crop.
- Prediction task: What happens to lettuce price and quantity sold?
- Your one-sentence justification: (Write it using the template.)
Case Set C: Simultaneous Shifts (Ambiguity and How to Handle It)
When both demand and supply shift, you can still do comparative statics, but you must be explicit about what is certain and what is ambiguous. The trick is to shift one curve at a time (mentally) and track how each shift pushes price and quantity, then combine the pushes.
How to Combine Two Shifts
- Price: If both shifts push price the same direction, price is unambiguous. If they push opposite directions, price is ambiguous.
- Quantity: If both shifts push quantity the same direction, quantity is unambiguous. If they push opposite directions, quantity is ambiguous.
C1) Demand Increases and Supply Increases (D → right, S → right)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Demand right, Supply right |
| Price effect | Ambiguous (demand ↑ pushes P up; supply ↑ pushes P down) |
| Quantity effect | Quantity rises (both shifts increase Q) |
| Real-world interpretation | Market expands, but the price outcome depends on which shift is larger |
Applied scenario: Electric vehicles and electricity
- Shock: More EVs increase demand for electricity, while new renewable capacity increases supply of electricity.
- Prediction task: Predict the direction of change in electricity price and quantity.
- Your one-sentence justification: (Write it using the template, using “ambiguous” where needed.)
Applied scenario: Seasonal produce with better logistics
- Shock: A health trend increases demand for blueberries, while improved cold-chain logistics increase supply reaching stores.
- Prediction task: Predict price and quantity.
- Your one-sentence justification: (Write it.)
C2) Demand Decreases and Supply Decreases (D → left, S → left)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Demand left, Supply left |
| Price effect | Ambiguous (demand ↓ pushes P down; supply ↓ pushes P up) |
| Quantity effect | Quantity falls (both shifts decrease Q) |
| Real-world interpretation | Market contracts; price depends on whether demand falls more or supply falls more |
Applied scenario: Downtown lunch market
- Shock: Fewer office workers reduce demand for lunches, and some restaurants close (reducing supply).
- Prediction task: Predict lunch price and quantity sold.
- Your one-sentence justification: (Write it.)
C3) Demand Increases and Supply Decreases (D → right, S → left)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Demand right, Supply left |
| Price effect | Price rises (both shifts push P up) |
| Quantity effect | Ambiguous (demand ↑ pushes Q up; supply ↓ pushes Q down) |
| Real-world interpretation | Shortages/pressure on availability are likely; quantity outcome depends on relative shift sizes |
Applied scenario: Gasoline (demand surge + supply disruption)
- Shock: A holiday weekend increases driving demand while a pipeline disruption reduces supply.
- Prediction task: Predict gasoline price and gallons sold.
- Your one-sentence justification: (Write it.)
Applied scenario: Housing (population inflow + building restrictions)
- Shock: Population inflow increases housing demand while new zoning limits reduce new construction supply.
- Prediction task: Predict rent and occupied units.
- Your one-sentence justification: (Write it.)
C4) Demand Decreases and Supply Increases (D → left, S → right)
| Four-Box Summary | Answer |
|---|---|
| Curve shift | Demand left, Supply right |
| Price effect | Price falls (both shifts push P down) |
| Quantity effect | Ambiguous (demand ↓ pushes Q down; supply ↑ pushes Q up) |
| Real-world interpretation | Downward pressure on price is clear; sales volume depends on which shift dominates |
Applied scenario: Seasonal produce (fad ends + bumper crop)
- Shock: A food trend ends (demand falls) at the same time as an unusually large harvest arrives (supply rises).
- Prediction task: Predict price and quantity sold.
- Your one-sentence justification: (Write it.)
Practice: Mixed-Shock Mini-Drills (Write One Sentence Each)
For each drill: (1) name the shock, (2) state which curve(s) shift and direction, (3) state the effect on price and quantity, (4) justify in one sentence.
- Housing: Mortgage rates fall (affecting buyers) while construction material costs rise (affecting sellers).
- Gasoline: A new fuel tax reduces demand while a new drilling technology increases supply.
- Seasonal produce: A drought reduces supply while household incomes rise, increasing demand for premium produce.
Common Pitfalls to Avoid (Comparative Statics)
- Confusing movement along a curve with a shift: In comparative statics here, you are asked to shift curves due to shocks, not slide along them due to price changes.
- Shifting the wrong curve: Ask: did the shock change buyers’ willingness to pay (demand) or sellers’ costs/capacity (supply)?
- Forgetting ambiguity: When both curves shift and push a variable in opposite directions, you must label it ambiguous unless you are told which shift is larger.
- Not stating the mechanism: Always include the “because” clause in your one-sentence justification.
