STATIC ANALYSIS

In economics, the concept of static refers to a situation where there is a movement. But this
movement is continuous, certain, regular and constant. Static economics does not deal with the
unexpected changes. It studies only the expected economic activities. There are no windfall
changes or fluctuations in economic activities. According to Prof. Harrod, “An economy in
which rates of output are constant is called static.”

Economic activities are repeated in different time periods in a static economy. No changes in
economic activities occur. For example, India’s national income increased by 5% in 1977-78.
The increase in 1978-79 and 1979-80 was also 5%. The study of national income is called a
static analysis because the rate of increase in national income is the same. In other words, this
study of India’s national income shows that Indian economy passed through a stationary state
during these years. According to J R. Hicks, “Economic statics covers that part of economic
theory where we do not trouble about dating.”

Prof. Schumpeter defined static analysis as “a method of dealing with economic phenomena that
tries to establish relations between elements of economic system, prices and quantities of
commodity, all of which refer to the same point of time.” In this way, from Schumpeter’s
definition we come to know that static analysis refers to the economic phenomena of the same
period. So time factor has no role to play in static analysis. This type of economic analysis refers
to a stable equilibrium.

According to Prof. Stigler, “The stationary state is an economy in which the tastes, resources and
technology do not change through time.” Static economic analysis is also known as a timeless
economy. The pricing of commodities is an important example of
static economy. Here we suppose that the price is determined by the
forces of demand and supply which belong to the same time period.
Price, demand and supply refer to the same time period.

The determinants of demand and supply are supposed to be

constant in static economics. Under perfect competition, price is
determined by the forces of demand and supply. This analysis of
pricing is related to economic statics. The meaning of static
economic analysis can be explained with the help of Fig. 1.2.

In the figure 1.2, DD is the market demand curve and SS is the market supply curve. E is the
point where the quantity demanded and supplied is equal to OM. The price OP is determined by
the interaction of the forces of demand and supply. Here demand, supply and price refer to the
same time period. And this timeless economic analysis is called static economic analysis. Prof.
Clark has pointed out the features of a static economy.

 No change in the population and its composition.

 No change in the quantity of capital.
 No change in the techniques of production.
 No change in the working and organisation of industrial units.
 No change in the habits, tastes and fashions of the people i.e. the wants of people same.

Scope and Importance of Static Economics:

 It is the simple and easy method of economic analysis. It is easier to understand and
economical in thought.
 It is the basis of the principle of free trade. The principle of free trade which was
favoured by classical economists like Adam Smith is an integral part of static economics.
 Robbins’ definition is also the subject matter of static economics. Robbins defined
economics as a science which studies human behaviour as a relationship between ends
and scarce means which have alternative uses. This definition is a part of static
economics.
 Static economics gives knowledge of the conditions of equilibrium. It tells that price is
determined where demand for the supply of goods is equal. Similarly, income is in
equilibrium where planned investment and planned savings are equal.
 It is the basis of dynamic analysis. Prof. Hicks has pointed out that static economics
occupies an important role because it gives a lot of information for the proper
understanding of dynamic economics. We can understand the path of equilibrium only
after studying the conditions of equilibrium.
 Keynes’ theory is also static in nature. It shows only a once-over change of variables like
consumption function, multiplier, liquidity preference, etc. The effect of once-over
change of economic valuables is studied in static economics.

Limitations of Static Economic Analysis:

1. Constancy of Variables: Prof. Clark and Stigler have assumed many economic variables as
constant. They are population, quantity of capital, natural resources, techniques of production,
habits and fashions, etc. We know that these economic factors change in reality. So static
economic analysis is far from reality.

2. Unrealistic Assumptions: Static analysis is based on unreal assumptions like perfect

competition, perfect mobility, perfect knowledge, full employment, etc. These assumptions are
far from the real world. That is why Prof. Hicks said, “Stationary state in the end is nothing but
an evasion.”
3. It ignores Time Element: Another shortcoming of the static analysis is that it studies a
timeless economy. But in reality, many changes occur with the passage of time. Therefore, it
gives a narrow explanation of economic problems.

4. It does not Explain the Path of Equilibrium: Static analysis explains only the final state of
equilibrium. And comparative statics compares only the two final equilibrium states. It does not
show how this new equilibrium has been reached. Though comparative static economic analysis
has many drawbacks, yet it occupies an important role in economics.

Many important classical laws are a part of static economic analysis. Moreover, it is a simple
type of economic analysis. It is easier to understand.

COMPARATIVE STATIC ANALYSIS

Static economics deals with explaining the determination of equilibrium values with a given
data. Any change in the determinants of equilibrium disturbs the equilibrium position.

In other words, when there is a change in the factors which establish equilibrium of demand and
supply, a new equilibrium position comes into being. Comparative static economics studies the
comparison of the old and new equilibrium positions. It does not study the path of change.

In comparative static economics, we take only the first equilibrium position and the final one; we
can compare them to find out the change. Instead of examining step by step the whole process of
transition from one stage of equilibrium to another, we take only two “Still” pictures and
compare them.

This method of analysis is called comparative statics. For example, when the demand as well as
the supply of onions is 50 kgs., price is one Re. per kg. Now suppose the demand increases to 6
kg’s. while supply remains the same. Price of onions increases to Rs. two per kg.

The study of the two equilibrium prices of onions is called comparative economic statics.
According to Prof. Lipsey, “Comparative statics involves a comparison of a new equilibrium
position with original equilibrium position due to change in some economic variable.”

According to Baumol, “Comparative static analysis can be used to show economic equilibrium
before and after a change in one or more variables without regard to the time required.” We can
explain the meaning of comparative static economics through Figure 1.3.
The diagram shows the determination of equilibrium price through the interaction of the forces
of demand and supply. E is the point where demand for and supply of the good are equal and OP
price is determined. Now due to some reason or the other, demand for the commodity increases.

That is why the DD demand curve shifts to D1D1. The new demand curve D1D1 intersects the
supply curve SS on point E1. Here the equilibrium price is determined at the level OP1 In
comparative static economics the old and the new equilibrium positions are compared.

In the above figure, we can compare E and E1 points of equilibrium. But it does not show how
the new point of equilibrium i.e. has been reached. In other words, comparative static economics
does not show the path of change. Here we can only compare the two still pictures of the
competitive market.