SummaryFirms in a perfectly competitive market may encounter some problems that can decrease their competitiveness and may even force them out of the market. The way they deal with problems will determine whether they can stay in the market. In this Learning Path we learn about these problems, how firms’ cost structures change, and how an equilibrium is reached in the market.
Comparative statics is a method used to analyse the result of changes in a model’s exogenous parameters by comparing the resulting equilibrium to the original one. However, this analysing method limits itself to comparing equilibriums, not analysing the reasons for the new equilibrium or the adjustment process. The use of comparative statics is of special interest for microeconomics when studying changes in demand and supply of a single market or a firm’s cost variation. It can also be used for macroeconomic purposes when studying changes in monetary or fiscal policies.
The use of comparative statics is as old as economics, and can be traced back to David Hume in 1752, when he studied how the increases in the stock of gold affected the prices in the economy. However, its use was formalized in the 20th century by John Hicks in his book “Value and Capital”, 1939, and Paul Samuelson in his book “Foundations of Economic Analysis”, 1947.