Chapter 14 · Test 3
Comparative Statics
Parameter changes, implicit differentiation, and the envelope theorem.
What you will learn
- Differentiate a reduced-form equilibrium
- Apply implicit differentiation
- Interpret the envelope theorem
Reasoning habits that help
- A reduced form makes comparative statics direct: differentiate the solved endogenous variable with respect to a parameter.
- Implicit differentiation tracks how an endogenous solution must move to keep an equilibrium equation satisfied.
- The envelope theorem values a parameter change using its direct effect at the optimum, without first solving for the change in the optimizer.
Where economists use these methods
- Reduced-form derivatives quantify how equilibrium changes when demand, supply, policy, or technology parameters shift.
- Implicit differentiation measures responses in models whose equilibrium variables cannot be conveniently solved in closed form.
- The envelope theorem values small policy or parameter changes without resolving the entire optimization problem.