Comparative Statics of Equilibrium Prices

Here, we test whether agents can reason about how prices and allocations (e.g., labor, capital, and goods) would respond to changes in the environment. The canonical tests are to see how changes in model primitives (e.g., productivity of the production process) or exogenous forces from outside the model (e.g., impact of weather), change the equilibrium price and allocations of labor, capital, etc. that would clear the market and equate demand and supply.

Elements

1. Comparative Statics with Total Factor Production Shocks

   Predicting how a productivity or wage shock changes the competitive price of a firm's output.

2. Comparative Statics with Inelastic or Perfectly Elastic Supply

   Predicting how the equilibrium price moves after cost and demand shocks when supply is fixed or perfectly elastic.