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Notes Chapter 8

This document provides an overview of comparative static analysis and total differentiation. It discusses how to find comparative static derivatives directly from the original model equation when no explicit reduced form solution is available. It also explains the concept of total differentials for functions with two or more variables. The document outlines the rules of differentials and provides examples of finding total differentials and derivatives of implicit functions.

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155 views

Notes Chapter 8

This document provides an overview of comparative static analysis and total differentiation. It discusses how to find comparative static derivatives directly from the original model equation when no explicit reduced form solution is available. It also explains the concept of total differentials for functions with two or more variables. The document outlines the rules of differentials and provides examples of finding total differentials and derivatives of implicit functions.

Uploaded by

awa_caem
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 8

COMPARATIVE STATIC ANALYSIS OF


GENERAL FUNCTION MODELS

Alpha Chiang, Fundamental Methods
of Mathematical Economics
3
rd
edition
Comparative Static Analysis
Significance: sometimes no explicit reduced form solution can be
obtained. Hence, we will have to find the comparative static
derivatives directly from the original equation of the model.
0 0
0
0 0 0
( , )
( , )
Y C I G
C C Y T
Y C Y T I G
= + +
=
= + +
Comparative Static Analysis
0 0 0
( , , ) Y Y I G T =
0 0 0
At neighborhood of Y the following identical equality will hold:
( , ) Y C Y T I G = + +
0
0
Partial differentiation, , does not do the job as T can affect C not only
directly, but also indirectly via Y. We must resort to total differentiation,
based on the notion of total differential
Y
T
c
c
s.
Because of the general form of the C
function, no explicit solution is available.
Differentials
Given a function ( ),
Example:
'( )
y f x
y
y x
x
dy
dy dx or dy f x dx
dx
=
A
| |
A A
|
A
\ .
| |

|
\ .
Example:
2
Given:
3 7 5
The derivative of the function is
6 7
(6 7)
y x x
dy
x
dx
dy x dx
= +
= +
= +
Differentials and Point
Elasticity


.
/ /
/ /
/ marginal function
/ average function
d
y x
dQ Q dQ dP
dP P Q P
dy dx
y x
c
c
=
=
Sample Questions
Find the differential dy, given

Given the import function , express income elasticity
of imports in terms of propensities to import
Given the consumption function C=a+bY, find the
marginal function and average function. Find
income elasticity of consumption and determine its
sign.
2
1
x
y
x
=
+
Total Differentials
Total differentials are for two or more variables:
( , )
Y i
S S Y i
S S
dS dY di
Y i
dS S dY S di
=
c c
= +
c c
= +
Total Differentials
In general,
1 2
1 2
1 2
1 1 2 2
1
( , ,..., )
...
...
n
n
n
n
n n i
i
U U x x x
U U U
dU dx dx dx
x x x
dU U dx U dx U dx U di
=
=
c c c
= + + +
c c c
= + + + =

Total Differentials
Partial elasticities:
1
S Y S i
U x
i
S Y S i
and
Y S i S
x S
x S
c c
c

c c
= =
c c
c
=
c

RULES OF DIFFERENTIALS
1 2
1 1 2 2
( , ) y f x x
dy f dx f dx
=
= +
1
2
0
( )
( )
( )
1
( )
n n
Rule I dk
Rule II d cu cnu du
Rule III d u v du dv
Rule IV d uv vdu udv
u
Rule V d vdu udv
v v

=
=
=
= +
| |
=
|
\ .


Examples:


2
1 2
2 2
1 1 2
1 2
2
1
1. 5 3
2. 3
3.
2
y x x
y x x x
x x
y
x
= +
= +
+
=
Find the total differentials of the following:
Total Derivatives
Question: how do we find the rate of change of a function
C(Y-bar, T
0
) with respect to T
0
, when Y-bar and T
0
are related?
Answer lies in the concept of total derivative.
y
x w
f g
Fig 8.4
Finding the total derivative
Consider the function x=g(w) where y=f(x,w)
with the three variables y, x and w related to one another as in
Figure 8.4 (a channel map).
It is clear that w, the ultimate source of change in this case, can
affect y through 2 channels:
indirectly, via the function g and then f (straight arrows)
directly, via the function f (curved arrow)
The partial derivative is adequate for expressing the direct
effect alone but a total derivative is needed to express both the
effects jointly.

To obtain total derivative
first, differentiate y totally to get the total
differential
then, divide both sides of this equation by the
differential dw.
x w
dy f dx f dw = +
: 1
x w
dy dx dw dw
f f Note
dw dw dw dw
dy y dx y
dw x dw w
(
= + =
(

c c
= +
c c
/ may be regarded as some measure of the rate of change of y with
respect to w. The first term measures the indirect effect .

The process of finding the total derivative dy/dw is r
dy dw
y dx
x dw
y dx
x dw
c
c
c
c
eferred to as
total differentiation of y with respect to w.
Example:
2 2
2 2 2
( , ) 3 ( ) 2 4
3(4 1) ( 2 ) 10 3
: by direct substitution:
3(2 4) 5 3 12
10 3
y f x w x w where x g w w w
dy y dx y
dw x dw w
dy
w w w
dw
Check
y w w w w w
dy
w
dw
= = = = + +
c c
= +
c c
= + + = +
= + + = + +
= +
Another example:
[ , ( )]
'( )
( )
Rearrange and it becomes similar to the previous example
[ ( ), ]
'( )
( )
U U c g c
dU U U
g c
dc c g c
U U g c c
dU U U
g c
dc g c c
=
c c
= +
c c
=
c c
= +
c c
More complicated example:
1
1 2
2
1 2
1 2
1 2
1 2
( )
( , , )
( )
w
x g w
y f x x w where
x h w
dy dx dx dw
f f f
dw dw dw dw
y dx y dx y
x dw x dw w
=

=
`
=
)
= + +
c c c
= + +
c c c
Derivatives of Implicit Functions
4
( ) 3 y f x x = =
4
2 2
3 0
( , ) 0
( , ) 0
y x
F x y
F x y x y
=
=
= + =
Explicit function :


Implicit Function :

Derivatives of Implicit Functions
1
1, ,
1
If the equation ( , , , ) 0 can be solved for ,
we can explicitly write out the function ( )
and find its derivatives by the methods learned before.
But if the equation, ( , , , ) 0
m
m
m
F y x x
y f x x
F y x x
=
=
= cannot be solved for
explicitly, we can make use of the implicit function rule.
The rule depends on the following basic facts:
1. if two expressions are identically equal, their
respective total differentials must be equal
2. the differentiation of an expression that involves

will yield an expression involving the differentials

3. if we divide dy by dx and let all the other
differentials be zero, the quotient can be
interpreted as the partial derivative .

1
, ,...,
m
y x x
1
, ,...,
m
dy dx dx
/ y x c c
General Rule:
1 1
1
1 1
1
other variables constant 1
1
... 0
Suppose that only and are allowed to vary, then the above equation reduces to
0
General Rule:
Given ( , , , ) 0 , if an im
y m m
y
y
m
F dy Fdx F dx
y x
F dy Fdx
F dy y
dx x F
F y x x
+ + + =
+ =
c
= =
c
=
1, ,
plicit function ( ) exists,
then the partial derivatives of f are:
, ( 1, 2,..., )

m
i
i y
y f x x
F y
i m
x F
=
c
= =
c
Examples
4
3
3
2 2
1. 3 0
12
12
1
2. ( , ) 9
2
2
2
2
x
y
y
x
y x
F dy x
x
dx F
F y x x y
F y
F x
dy x
dx y
=

= = =
= +
=
=
=
Examples
3 2 3
3
2 2
tan
tan
tan
3. ( , , ) 3 0
2
3
4. ( , , )
x
y
K
K
L cons t Q
L
L
K cons t Q
L
Q cons t K
F y x w y x w yxw
F y y x yw
x F y x xw
F Q K L
F Q
MP
K F
F Q
MP
L F
F K
L F
=
=
=
= + + =
c +
= =
c +
c
= =
c
c
= =
c
c
=
c

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