Ch.

6 Comparative Statics and the

Concept of Derivative
6.1The Nature of Comparative Statics
6.2Rate of Change and the Derivative
6.3The Derivative and the Slope of a Curve
6.4The Concept of Limit
6.5Digression on Inequalities and Absolute Values
6.6Limit Theorems
6.7  Continuity and Differentiability of a Function

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5.8 Limitations of Static Analysis
• Static analysis solves for the endogenous
variables for one equilibrium
• Comparative statics show the shifts between
equilibriums
• Dynamics analysis looks at the attainability
and stability of the equilibrium

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 6.1 The Nature of Comparative Statics

• Comparative statics: a study of different

equilibrium states associated with different sets of
values of parameters and exogenous variables.
• Begin by assuming an initial equilibrium is given
• Examples
– Isolated market model (P0,Q0) (shock) (P1,Q1)
– National income model (Y0, C0) (shock) (Y1, C1)

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6.1 Shift in Demand

Qs

P1
P0

Qd1
Qd0
Q0 Q1 Q

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6.1 Comparative statics

Static equilibium analysis

0) y* = f(x)
Comparative static equilibrium analysis
1) y1* - y0* = f(x1) - f(x0)
Where the subscripts 0 and 1indicate initial
and subsequent points in time respectively

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6.2 Rate of Change and the Derivative
The difference quotient & the derivative
Let y = y1-y0 and
x = x1-x0 or x1 = x0 + x
Substituting into eq. (1)
2) y =f(x0 + x) - f(x0)
Divide both sides of eq. (2) by x and
take the limit as x -> 0
y f xo  x   f x0 
3) 
x x
y f x0  x   f x0 
4) lim  lim
x 0 x x 0 x

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 6.1 Comparative statics
• Issues:
– Quantitative & qualitative of change or
– Magnitude & direction
The rate of change, i.e., the derivative (Y/ G)

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Macro-economic model
(Section 3.5, #1b p. 53)
Given
• Y = C + I0 + G0
• C = a + b(Y-T)
• T=d+tY

Solving for Y
• Y* = (a-bd+ I0 + G0)/(1-( b(1-t)))
y1*  y0*
• ?
x1  x0
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 6.2 Difference quotient

• If y=3x2-4, then Y f  X o  X   f  X 0 

X X
f x0   3x02  4
f x0  x   3x0  x   4
2


y 3x0  x   4  3 x02  4

2

x x
3x02  6 x0 x  3x 2  4  3x02  4

x

 6 x0  3x
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 6.2 The derivative

dy Y f  X  X   f  X 
f X    lim  lim
dx x0 X x0 X

• From the previous problem in which y=3x2-4

• The difference quotient & derivative equal:

y y
 6 x0  3x lim  6 x0
x x 0 x

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 Difference Quotient
y=f(x) f(x)
Secant slope:
f(x0+x) rise/run =
f(x0+x)-f(x0)/
(x1-x0)

f(x0)
x
x0 x1
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y = 3x2 – 4 (red)
y/x = 6x + 3dx ; x = 3, dx = 4, y/x = 30
Y = 30x – 67, secant through pts (3, f(3), 7, f(7)) (blue)

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Y = 3x2 – 4
Y/x= 6x + 3dx; x = 3, dx = 3, Y/x = 27
Y = 27x – 58, secant through pts (3, f(3), 6, f(6))

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Y = 3x2 – 4
Y/x= 6x + 3dx; x = 3, dx = 2, Y/x = 24
Y = 24x – 49, secant through pts (3, f(3), 5, f(5))

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Y = 3x2 – 4
Y/x= 6x + 3dx; x = 3, dx = 1, Y/x = 21
Y = 21x – 40, secant through pts (3, f(3), 4, f(4))

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Y = 3x2 – 4
Y/x= 6x + 3dx; x = 3, dx = .5, Y/x = 19.5
Y = 19.5x – 35.5, secant through pts (3, f(3), 3.5, f(3.5))

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Y = 3x2 – 4
Y/x= 6x + 3dx; x = 3, As dx  0, lim Y/x = 18
Y = 18x – 31, tangent at point (3, f(3))

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6.3 The Derivative and the Slope of
a Curve
y
C B

y
A

x

x0 x1 x2

As the lim of x0, then the f'(x) measures the tangent (rise
over run) of f(x) at the initial point A
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Concept of a Limit

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6.4 Concept of limits

• The limit (f(x), xa, direction)

function attempts to compute
q
the limiting value of f(x) as x
approaches a from left or right.
(eg., N, infinity, undefined)
• If q = g(v), what value does q L

approach as v approaches N?
Answer: L
• As v  N from
v  N either side, q

 L. In this case both the left- v

N
side limit (v less than N) and vN vN
the right side-limit are equal.
• Therefore lim q = L
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6.4 Concept of limits

• If q = g(v), what value does q

approach as v approaches N?
• Answer1: lim q = M q
v+
• Answer2: lim q = M
M
v-
• In certain cases, only the limit
of one side needs to be
considered. In taking the limit
of q as v  + , for instance,
only the left-side limit of q is
relevant, because v can v  - V  +
approach +  only from the
left.
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6.4 Evaluation of a limit

• To take a limit, substitute successively smaller values that tend to N

from both the left and right sides since N may not be in the domain of
the function
• If v is in both the numerator and denominator remove it from either
depending on the function
• Formal view of the limit concept: for a given number L, there can
always be found a number (L-a1) < L and and other (L+a2)>L, where
a1 and a2 are arbitrary positive numbers. These numbers line in the
neighborhood of a point on a line.

( L  a1 , L  a 2 )  q | L  a1  q  L  a 2 }

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6.4 Concept of a limit
• As v approaches a number N, the limit of q=g(v) is the
number L, if, for every neighborhood of L that can be
chose, however small, there can be found a corresponding
neighborhood of N (excluding v=N) in the domain of the
function such that, for every value of v in that N-
neighborhood, its image lies in the chosen L-
neighborhood.

( L  a1  q  L  a 2 )
( N  b1  v  N  b2 )
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 6.4 Concept of a limit
• Given q = (2v + 5)/(v + 1), find the lim q as v  +
infinity.
• Dividing the numerator by denominator

2v  5 3
q  2
v 1 v 1
lim q  2
v  

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6.5 Digression on Inequalities and Absolute
Values: Rules of inequalities
Absolute values and inequalities
• Rule I (addition and subtraction)
a > b result in a ± k > b ± k
• Rule II (multiplication and division)
a > b results in ka > kb when k>0
a > b results in ka < kb when k<0
• Rule III (squaring)
a > b (b0) results in a2 > b2
• /n/ absolute value
(-n < /n/ < n)

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 6.5 Digression on Inequalities

• Solve the inequity |1-x| <= 3 for x

 3  1 x  3
 4  x  2
4  x  2

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6.4The Concept of Limit
Left-side limit and right-side limit;
Graphical illustrations; Evaluation of a limit;
Formal view of the limit concept

y
lim
x 0 x 0

• Let qy/x and v x such that q =f(v) and

y
lim  lim q
x 0 x v 0

• What value does variable q approach as variable v

approaches 0?
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6.6 Limit Theorems
Theorems involving a single function
Theorems involving two functions
Limit of a polynomial function
• If q=av+b, then lim=qaN +b
v N
• If q = g(v) = b, lim=q b
v N
• If q = v, then =N
lim q
• If q = vk, then =vNNk
lim q
v N

• lim(q1  q2 )  lim(q1 )  lim(q2 )

v N v N v N

lim (q1  q2 )  lim (q1 )  lim (q2 )

• v N v N v N

lim (q1 / q2 )  lim (q1 ) / lim (q2 )

v N v N v N
•
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 6.6 Limit Theorems
• Find lim (1+v)/(2 + v) as v0

L1 lim 1  v 1
 v 0

L2 lim2  v  2
v 0

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Continuity and Differentiability of a
Function

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6.7 Continuity and Differentiability of a Function
Continuity of a function; Polynomial and rational
functions; Differentiability of a function

• A continuous function:
– When a function q=g(v) possesses a limit as v tends to
the point N in the domain
– When this limit is also equal to g(N), i.e., the value of the
function at v=N
– Then the function is continuous in N

lim q(v)  g (n)

v N

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 6.7 Continuity and Differentiability of a
Function
• This rational function is not defined at v = 2 and -2 even
though the limit exists as v  2 or -2. It is discontinuous
and therefore does not have continuous derivatives, i.e., it
is not continuous differentiable.

3 2
v  v  4v  4
q 2
v 4

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 6.7 Continuity and Differentiability of a
Function
• This continuous function is not differentiable at x
= 3 and therefore does not have continuous
derivatives, i.e., it is not continuously
differentiable

y  5  x, where( x  3), x  1, where( x  3)

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 6.7 Continuity and differentiability of a
function
• For a function to be continuous differentiable
– All points in in domain of f defined
– When the limit concept is applied to the difference
quotient at x = x0 as x  0 from both directions. The
continuity condition is necessary but not sufficient.
– The differentiability condition (smoothness) is both
necessary and sufficient for whether f is differentiable,
i.e., to move from a difference quotient to a derivative

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