Comparative

statics

Introductory mathematical economics focuses on static analysis

Comparative
statics
It is the comparison of two different economic outcomes or equilibria, i.e., before
and after a change in some underlying parameter.

1
 Review:
The derivative

The rate of change in y given a

∆𝑦1
particular change in x is given by:
∆𝑥1
f(x) ∆𝑦 𝑓 𝑥0 +∆𝑥 −𝑓 𝑥0
f(∆x+ x0) =
E1 ∆𝑥 𝑥0 +∆𝑥 − 𝑥0

f(x0)
This can be estimated for smaller
E0 changes in x by making ∆𝑥 smaller.

x
x0 (x0 +∆x)
Source: Sydsaeter(2012), page157

2
 y

∆𝑦2
The rate of change in y given a
∆𝑥2
particular change in x is given by:
f(x) ∆𝑦 𝑓 𝑥0 +∆𝑥 −𝑓 𝑥0
=
E1 ∆𝑥 𝑥0 +∆𝑥 − 𝑥0
E2
This can be estimated for smaller
E0 changes in x by making ∆𝑥 smaller.

Source: Sydsaeter(2012), page157

y ∆𝑦3
∆𝑥3
The rate of change in y given a
particular change in x is given by:
f(x) ∆𝑦 𝑓 𝑥0 +∆𝑥 −𝑓 𝑥0
=
E1 ∆𝑥 𝑥0 +∆𝑥 − 𝑥0
E2
E3 This can be estimated for smaller
E0 changes in x by making ∆𝑥 smaller.
∆𝑦 𝑓 𝑥0+∆𝑥 −𝑓 𝑥0
lim = lim
∆𝑥 →0 ∆𝑥 ∆𝑥 →0 𝑥0+∆𝑥 − 𝑥0

Which we familiarly refer to as the

derivative of the function.

Source: Sydsaeter(2012), page157

3
The derivative measures infinitesimal, instantaneous rate of change

∆𝑦 𝑓 𝑥0 +∆𝑥 −𝑓 𝑥0
lim = lim
∆𝑥 →0 ∆𝑥 ∆𝑥 →0 𝑥0 +∆𝑥 − 𝑥0

Given a function, f(x) we denote the derivativeas either of the followingnotations:

∆𝑦 𝑑𝑦
lim
∆𝑥 →0 ∆𝑥
𝑓′(𝑥) 𝑓′
𝑑𝑥
Source: Sydsaeter(2012), page158

REVIEW: RULES ON DIFFERENTIATION (Part I)

1. Power rule, page 176

2. Differentiation of sums and differences, page 178
3. Derivative of a product, page 179
4. Derivative of a quotient, page 181
5. Chain rule, page 187

4
 EXERCISE: Determine what is asked
1 Suppose a firm faces a total cost function, C(Q) = Q3+4Q2 + 10Q + 75.
Derive its marginal cost function, MC, such that MC = dC/dQ.
2 Suppose a monopolist faces a demand function, Q = 27 − 3P. Derive
its revenue function, R, such that R(Q) = PQ, and its marginal revenue
function, MR, such that MR = dR/dQ.
3 Suppose a consumer has a consumption function as a function of
income, C(Y) = 10 + 0.7Y − 0.002Y2. Derive its marginal propensity to
consume, MPC, depicting how consumption changes with income, such
that MPC = dC/dY.

Solution to number 1
Suppose a firm faces a total cost function, C(Q) = Q3+4Q2 + 10Q + 75. Derive its marginal
cost function, MC, such that MC = dC/dQ.

C(Q) = Q3 + 4Q2 + 10Q + 75

C’(Q) = 3Q2 + 8Q + 10
MC = 3Q2 + 8Q + 10

5
Solution to number 2
Suppose a monopolist faces a demand function, Q = 27 − 3P. Derive its revenue function, R,
such that R(Q) = PQ, and its marginal revenue function, MR, such that MR = dR/dQ.

Q = 27 − 3P ⇒3P = 27 – Q
27 – Q 1
P= ⇒P = 9 − Q
3 3
1
R(Q) = PQ = 9 − Q Q
3
1 2
R(Q) = 9Q − Q
3
2
R’(Q) = 9 − Q
3
2
MR = 9 − Q
3

Solution to number 3
Suppose a consumer has a consumption function as a function of disposable income,
C(YD) = 10 + 0.7 YD − 0.002 YD 2. Derive its marginal propensity to consume, MPC, such that
MPC = dC/d YD.
C(YD) = 10 + 0.7 YD − 0.002 YD 2
C’(YD) = 0.7 − 0.004 YD
MPC = 0.7 − 0.004 YD

6
INTERPRETING MARGINAL FUNCTIONS
In economics, marginal functions provide a good approximation of the
change in the value of the function following an incremental change in the
independent variable.
For example, Consider a firm producing some commodity in a given period,
and let C(x) denote the cost of producing x units. The derivative C’(x) at x is
called the marginal cost at x. Thus, for a small change in x (denoted as h), the
incremental cost of producing h extra units is the product of the marginal cost
and the change in output, or simply hC’(x).

Source: Sydsaeter(2012), page166

EXERCISE. Let C(x) denote the cost in millions of dollars for removing x%
of the pollution in a lake. Give an economic interpretation of the equality
C‘(50) = 3.

Because of the linear approximation C(50+h) − C(50) ≈ hC’(50), the precise

interpretation of C’(50) = 3 is that, starting at 50%, for each 1% of pollution that
is removed, the additional cost is about 3 million dollars. Less precisely, C’(50)
= 3 means that it costs about 3 million dollars extra to remove 51% instead of
50% of the pollution.

Source: Sydsaeter(2012), page167

7
 EXERCISE: Solve for the derivative of the following functions, or determine
what is asked
1 5x + 2
y=
x2 − 2x + 1
2
ax2+ b
y=
cx
3
y = (4x3 + 5)(3x2 − 8)
4
Consider a firm’s average cost function, AC = C(Q)/Q. The slope of
the AC curve can be found by finding its derivative d(AC)/dQ. Using
this, show that MC intersects at the AC curve at its minimum.

Solution to number 3
Consider a firm’s average cost function, AC = C(Q)/Q. The slope of the AC curve can be
found by finding its derivative d(AC)/dQ. Using this, show that MC intersects at the AC curve
at its minimum.
By definition, total cost = C(Q). Average cost (AC) is total cost divided by the quantity, thus
AC = C(Q)/Q . Using the quotient rule, the derivative of the AC curve can be derived as:
dAC Q [C'(Q)] − [C(Q)] 1
=
dQ Q2
dAC C′(Q) C(Q)
= − 2
dQ Q Q
dAC 1 C(Q)
= C′(Q) −
dQ Q Q2
dAC 1
= MC − AC
dQ Q

8
Solution to number 3
Consider a firm’s average cost function, AC = C(Q)/Q. The slope of the AC curve can be
found by finding its derivative d(AC)/dQ. Using this, show that MC intersects at the AC curve
at its minimum.
dAC 1
Using the following expression: = MC − AC , and assuming Q > 0 (that is, the firm
dQ Q
is producing positive units of output), the following can be established:
dAC
>0 if MC >AC
dQ
dAC
=0 if MC =AC
dQ
dAC
<0 if MC <AC
dQ

Solution to number 3
Consider a firm’s average cost function, AC = C(Q)/Q. The slope of the AC curve can be
found by finding its derivative d(AC)/dQ. Using this, show that MC intersects at the AC curve
at its minimum.
Simply put, the slope of the AC curve is positive if MC lies above AC; zero if MC intersects
AC; and negative if MC lies below AC. This establishes the familiar result that the MC curve
intersects the AC curve at its minimum point.

9
Costs
MC
Ac

GRAPHICAL ILLUSTRATION. If MC is below

ATC, this means that the last unit produced costs
less than the average cost of all the previous units
produced. This implies that the new ATC must be
less than the old ATC, so ATC must be falling.
Q

Solve for the derivative of the following equations, or determine what is asked.

1
y = 3(2x +3)5
2
y = (x2 +3x − 2)17
3
Given the firm’s total revenue function, R = f(Q), where output, Q, is
a function of labor input, L, such that Q = g(L), find the marginal
revenue product of labor, MRPL = dR/dL.

10
Solution to number 1
y = 3(2x+3)5

Let u = 2x+3, and y = 3u2. Using chain rule:

dy dy du
= ∗
dx du dx
dy
= 6u ∗2
dx
dy
= 6(2x+3) ∗ 2
dx
dy
= 24x + 60
dx

Solution to number 2
y = (x2 +3x − 2)17

Let u =x2 +3x − 2, and y = u17. Using chain rule:

dy dy du
= ∗
dx du dx
dy
= 17u 16 ∗ 2x + 3
dx
dy
= 17 (x2 +3x − 2)16 2x + 3
dx

11
Solution to number 3
Given the firm’s total revenue function, R = f(Q), where output, Q, is a function
of labor input, L, such that Q = g(L), find the marginal revenue product of
labor, MRPL = dR/dL.
dR dR dQ
= ∗
dL dQ dL
dR
= f ’(Q) ∗ g’(Q)
dL
dR dR
= f ’(Q) ∗ g’(Q). In economic terms, , is the marginal revenue product of labor (MRPL).
dL dL
f '(Q) is the marginal revenue function (MR), and g’(L) is the marginal physical product of
labor (MPPL). Thus our result gives us the well-known economic relationship:
MRPL = MR * MPPL

REVIEW: RULES ON DIFFERENTIATION (Part II)

6. Differentiating natural exponential functions, page 194

(Properties of natural exponential functions, page 196)
7. Differentiating natural exponential functions, page 196
8. Differentiating logarithmic functions, page 197
(Properties of natural exponential functions, page 200)
9. Logarithmic differentiation, page 200

12
 Solve for the derivative of the following equations, or determine what is asked.

1
lnx
y=
x2
y = ln(2x2+3x)
2

2
y = e−0.5x
3

4
y = x2ln(4x+2)
5
y =e−x

Solution to number 1
lnx
y=
x2
Using quotient rule:
dy (x2)(1/x) − (lnx)(2x)
=
dx (x2) 2
dy x − (lnx)(2x)
=
dx x4
dy 1 − 2(lnx)
= x3
dx
dy 1 − 2(lnx)
= x3
dx

13
Solution to number 2
y = ln(2x2+3x)

Let u =2x2+3x, and y = ln(u).Using chain rule:

dy dy du
= ∗
dx du dx
dy 1
= (4x+3)
dx 2x2+3x
dy 4x+3
= 2
dx 2x +3x

Solution to number 3
2
y = e−0.5x

Let u =- 0.5x2, and y = eu .Using chain rule:

dy dy du
= ∗
dx du dx
dy 2
= e−0.5x ( − x)
dx
dy 2
=−x e−0.5x
dx

14
Solution to number 4
y = x2ln(4x+2)

Using product rule:

dy 1
= (x2) (4) + (2x)[ln(4x+2)]
dx 4x+2
dy 2x2
= +(2x)[ln(4x+2)]
dx 2x+1

Solution to number 5
y =e−x

Let u =-x, and y = eu .Using chain rule:

dy dy du
= ∗
dx du dx
dy −x
= e ∗ (-1)
dx
dy
=−e−x
dx

15
 Partial
differentiation

Partial differentiation applies for multivariate functions (that is,

functions of more than one variable
∂y
= fxi
∂xi
Consider a given function, y = f(x1,x2, …, xn). When there is more than one
variable, the partial differentiation allows for an analysis of how one variable
changes with infinitesimal changes in another, holding all the other
independent variables constant. This is similar to implementing ceteris
paribus assumptions.

Source: Sydsaeter(2012), page383-384

16
 Derive all partial derivatives of the following equations

1
f(x1, x2) =3x1 2 + x x + 4x2
2
1 2 2
2
f(u, v) = (3u − 2v)(u + 3v)−1
3
f(x, y) = xe(2x+3y)
f(x, y, z) = ln(xyz)
4

Solution to number 1
2 + x x + 4x2
f(x1, x2) =3x1 1 2 2
∂f
= f = 6x1 + x2
∂x1 x1
∂f
= f = x + 8x2
∂x2 x2 1
INTERPRETATION: The effect of changing x1, holding x2 constant is
predicted by the function, fx1. The effect of changing x2, holding x1 constant
is predicted by the function, fx2.

17
Solution to number 2
f(u, v) = (3u − 2v)(u2 + 3v)−1

∂f -3u2 + 4uv + 9v
=f =
∂u u (u2+3v)2
∂f −u(2u+9)
= fv = 2
∂v (u +3v)2
INTERPRETATION: The effect of changing u, holding v constant is
predicted by the function, fu. The effect of changing v, holding u constant is
predicted by the function, fv.

Solution to number 3
f(x, y) = xe(2x+3y)

∂f
= f = 2xe(2x+3y) + e(2x+3y)
∂x x
∂f
= f = 3xe(2x+3y)
∂y y
INTERPRETATION: The effect of changing x, holding y constant is
predicted by the function, fx. The effect of changing y, holding x constant is
predicted by the function, fy.

18
Solution to number 4
f(x, y, z) = ln(xyz)
∂f 1 1
= fx = (yz) =
∂x xyz x
∂f 1 1
= fy = (xz) =
∂y xyz y
∂f 1 1
= fz = (xy) =
∂z xyz z
INTERPRETATION: The effect of changing x, ceteris paribus, is predicted by
the function, fx. The effect of changing y, ceteris paribus, is predicted by the
function, fy. The effect of changing z, ceteris paribus, is predicted by the
function, fz.

Applications of
Comparative statics

19
LINEAR MARKET MODEL AT EQUILIBRIUM

QD = a – bP
QS = α + βP
QD = QS
Consider the simplest linear market model we solved in Module 1. Once
again, a and b are positive parameters of the demand function QD, while α
and β are positive parameters of the supply function, QS. From module 1, we
derived the following equilibrium conditions:
a–α aβ + αb
P∗ = Q∗ =
b+β b+β

LINEAR MARKET MODEL AT EQUILIBRIUM

Suppose a increases, ceteris paribus. What happens to the equilibrium
quantity and price? To answer this comparative statics question, we need to
determine how prices and quantity changes if a changes:

∂P* 1 +
=
∂a b + β +
∂P∗
>0
∂a
It is given that b and β are positive parameters, and 1 is always positive as
∂P∗
well. The expression is always positive. Thus, an increase in parameter
∂a
a increases the equilibrium price, ceteris paribus.

20
LINEAR MARKET MODEL AT EQUILIBRIUM
Suppose a increases, ceteris paribus. What happens to the equilibrium
quantity and price? To answer this comparative statics question, we need to
determine how prices and quantity changes if a changes:

∂Q* β +
=
∂a b + β +
∂P∗
>0
∂a
∂Q∗
It is given that b and β are positive parameters, The expression is
∂a
always positive. Thus, an increase in parameter a increases the equilibrium
quantity, ceteris paribus.

LINEAR MARKET MODEL AT EQUILIBRIUM

To summarize, an increase in parameter a increases the equilibrium quantity
and price, ceteris paribus. To confirm this answer, let’s illustrate graphically.

21
P

Graphically, a and α are the y-

QS = α + βP intercepts of the demand and
supply schedules, respectively.
a Furthermore, b and β are the
slopes of the demand and
supply schedules, respectively.
E0
P0 At the equilibrium, E0;
aβ + αb a – α
E0 ,
b+β b+β
α
QD = a – bP

Q
Q0

a' Increasing a, or increasing the

QS = α + βP y-intercept of the demand
schedule, is basically shifting
a the demand curve outward.
E1
P1 At the new demand schedule
E0 where a’ > a, the new market
P0 equilibrium at E1 has higher
Q'D = a' – bP prices and quantities: P0 < P1;
and Q0 < Q1.This validates our
observations from the
α comparative statics exercise.
QD = a – bP

Q
Q0 Q1

22
 EXERCISE. Consider the simple linear market model previously discussed.
Suppose α increases, ceteris paribus. What happens to the equilibrium
quantity and price? Explain your answer in detail, and graphically verify.

SIMPLE MACROECONOMIC MODEL

Y = C + A0
C = a + b(Y − T )
T = d + tY

Consider the macroeconomic model we solved in Module 1 (page 53) . Once

again, Y is income, C is consumption, T is tax revenue, A0 is positive
(exogenous) autonomous expenditure, and a, b, d, and t are all positive
parameters less than 1. From module 1, we derived the following equilibrium
income as:
a − bd + A0
Y=
1 − b(1 −t)

23
SIMPLE MACROECONOMIC MODEL
Suppose t increases, ceteris paribus. In the model, t is the personal income
tax rate. It is the percent of income that is being taxed. What happens to
equilibrium income? To answer this comparative statics question, we need to
determine how income changes when t changes:
a − bd + A0 a − bd + A0
Y= =
1 − b(1 −t) 1 − b + bt
∂Y* (1 − b + bt)0 -(a − bd + A0)b
=
∂t (1 − b + bt)2

Let us analyze each term:

SIMPLE MACROECONOMIC MODEL

0
∂Y* (1 − b + bt)0 -(a − bd + A0)b
=
∂t (1 − b + bt)2

The first term in the numerator, highlighted in green, is zero because anything
multiplied by zero is zero.

24
SIMPLE MACROECONOMIC MODEL

-
∂Y* (1 − b + bt)0 -(a − bd + A0)b
=
∂t (1 − b + bt)2

The expression (a – bd) is positive. It is defined that a, b, and d are all positive
parameters less than 1, it must the case that a > bd. Because A0 is positive
then (a – bd +A0) is also positive. Because b is positive, then (a – bd +A0)b is
also positive. The negative sign at the second term makes −(a − bd + A0)b
negative.

SIMPLE MACROECONOMIC MODEL

∂Y* (1 − b + bt)0 -(a − bd + A0)b

=
∂t (1 − b + bt)2
+
The expression (1 - b + bt)2 is positive because anything squared is positive.

25
SIMPLE MACROECONOMIC MODEL

0 -
∂Y* (1 − b + bt)0 -(a − bd + A0)b
=
∂t (1 − b + bt)2
+
To summarize, the numerator is negative and the denominator is positive. In
division, something negative divided by something positive results to a net
negative result. Thus an increase in tax rate decreases equilibrium income,
ceteris paribus. Our results are intuitive because higher taxes decreases
disposable income and decreases the economy’s expenditures.

EXERCISE. Consider the simple macroeconomic model previously

discussed. Suppose t increases, ceteris paribus. What happens to
equilibrium consumption? Explain your answer in detail.

26
AGRICULTURAL PRODUCTION FUNCTION
Consider a Cobb-Douglas agricultural production function Y = F(K,L,T),
where Y is the number of units produced, K is capital invested, L is labor
input, and T is the area of agricultural land that is used. A, a, b, and c are
positive constants

F(K,L,T) = AKaLbTc
Find the marginal products, and the second-order partials. Discuss their
signs.

Source: Sydsaeter(2012), page404

Solution
F(K,L,T) = AKaLbTc
∂F
= AaKa-1LbTc
∂K
∂F
= AbKaLb−1Tc
∂L
∂F
= AcKaLbTc−1
∂T
Assuming K, L, and T are all positive (meaning the firm is not consuming
negative amounts of land, labor, and capital), then all partial derivatives are
positive. Thus, an increase in capital, labor, or land will increase the number of
units produced.
Source: Sydsaeter(2012), page404

27
Solution
F(K,L,T) = AKaLbTc
∂2F
= F = Aa(a-1)Ka-2LbTc
∂K∂K KK
∂2F
= FKL = AabKa-1Lb−1Tc
∂L∂K
∂2F
= FKT = AacKa-1LbTc−1
∂T∂K

Deriving the second-order partial derivatives with respect to capital results to

the following. Let us analyze each expression.

Source: Sydsaeter(2012), page404

Solution
F(K,L,T) = AKaLbTc
-
∂2F
= FKK = Aa(a-1)Ka-2LbTc
∂K∂K

Following the assumptions, all terms in the expression above are positive
except for (a-1). Under multiplication rules, this makes the second derivative,
FKK, negative. FKK is the partial derivative of the marginal product of capital.
Jointly interpreting the results FK > 0 but FKK < 0 means that although small
increases in capital increases output (FK > 0), ceteris paribus, the rise occurs
at a decreasing rate (FKK < 0).

Source: Sydsaeter(2012), page404

28
Solution
F(K,L,T) = AKaLbTc
∂2F
= FKL = AabKa−1Lb−1Tc
∂L∂K
∂2F
= FKT = AacKa−1LbTc−1
∂T∂K
The mixed second-order partials with respect to capital depicted above derive
the marginal product of labor as capital changes (FKL) and the marginal
product of land as capital changes (FKT). All terms in the expressions above
are positive. Thus, an increase in capital increases the marginal product of the
other factors, ceteris paribus. Another way to describe it is that each pair of
factors complementary.
Source: Sydsaeter(2012), page404

EXERCISE. Answer the following:

1 Sydsaeter (2012), Problems for Section 11.7, number 1, page 405

2
Sydsaeter (2012), Problems for Section 11.7, number 3, page 406
3
Chiang and Wainright (2005), Exercise 7.4, number 5, page 169

29
 elasticities

If f is differentiable at x and f(x) ≠ 0, we define elasticity of f with

respect to x as:
x
Elx f(x) = f(x) f '(x)

For example, price elasticity of demand refers to the degree of sensitivity to

which consumers change their quantity demanded in response to price
changes. Income elasticity of demand refers to change in quantity demanded
in response to income changes.

Source: Sydsaeter(2012), page230

30
If f is differentiable at x and f(x) ≠ 0, we define elasticity of f with
respect to x as:
x
Elx f(x) = f(x) f ′(x)

Condition Description Interpretation

| Elx f(x) | = 0 f is perfectly inelastic at x A change in x does not influence f(x)
| Elx f(x) | < 1 f is inelastic at x A 1% change in x yields a less than 1% change in f(x)
| Elx f(x) | = 1 f is unit elastic at x A 1% change in x yields a 1% change in f(x)
| Elx f(x) | > 1 f is elastic at x A 1% change in x yields a more than 1% change in f(x)
| Elx f(x) | = ∞ f is perfectly elastic at x A change in x yields an infinite change in f(x)

Source: Sydsaeter(2012), page231

Example. Find the elasticity of f (x) = Axb, where A and b are

constants and A ≠ 0.
x
Elx f(x) = f ′(x)
f(x)
x
Elx f(x) = b Abxb-1
Ax
Elx f(x) = x(xb−1) = xb-1+1

Elx f(x) = b, which is a constant. This is an example of a function with constant elasticity.

Source: Sydsaeter(2012), page230

31
Example. Compute the elasticity of D(p) = 8000p-1.5 and find the
exact percentage change in quantity demanded when the price
increases by 1% from p = 4.
p
ElxD(p) = D'(p)
D(p)
p
ElxD(p) = 8000(-1.5)p-2.5
8000p-1.5
ElxD(p) = −1.5p1+1.5-2.5
ElxD(p) = −1.5
An 1% increase in the price causes quantity demanded to decrease by about 1.5%.
Demand is considered price elastic. At price p = 4, a 1% change in price results to p = 4.04.
The exact change in demand is D(4.04) - D(4) = -14.81 units, registering a 1.48% decrease.
Source: Sydsaeter(2012), page230

Example. Compute the elasticity of Q = 200 – 4p. At what price is

demand unit elastic?
p
ElxQ(p) = Q'(p)
Q(p)
p
ElxQ(p) = (– 4)
200 – 4p
– 4p
ElxD(p) =
200 – 4p

–p
ElxD(p) = .Demand is unit elastic if |ElxD(p)| = 1.
50 – p

32
Example. Compute the elasticity of Q = 200 – 4p. At what price is
demand unit elastic?
–p
|ElxQ(p)| = =1
50 – p
–p –p
Case 1: |ElxQ(p)| = =1 Case 2: |ElxQ(p)| = = −1
50 – p 50 – p
– p = 50 – p – p = – 50 + p
no solution p = 25

–p
ElxD(p) = .Demand is unit elastic if |ElxD(p)| = 1, which is at p = 25.
50 – p

Example. A study in transport economics uses the relation T = 0.4K1.06,

where K is expenditure on building roads, and T is a measure of traffic
volume. Find the elasticity of T w.r.t. K. In this model, if expenditure
increases by 1%, by what percentage (approximately) does traffic
volume increase?
K
ElK T(K) = T′(K)
T(K)
K
ElK T(K) = (0.4*1.06) K0.06
0.4K1.06
ElK T(K) = 1.06
A 1% increase in expenditure on road building leads to an increase in the traffic volume of
approximately 1.06%.
Source: Sydsaeter(2012), page232

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