“All along the curves”: Bridging the gap between comparative statics and simultaneous econometric models

Abstract

A simultaneous econometric model of supply and demand provides estimates of own-price effects and the effect of exogenous variables on supply or demand. Most of the time economists use elasticities derived from econometric analysis in a ceteris paribus context, more seldom in a total elasticity setting (Buse in J Farm Econ 40:881–891, 1958). Perhaps even more seldom net effects of exogenous changes on prices and quantities are determined in a Muth (Oxf Econ Pap 16:221–234, 1964) type model. In this paper, we replicate the econometric model by Epple and McCallum (Econ Inq 44:374–384, 2006) and use it to specify a comparative static model that quantifies the period-to-period net effects on price and quantity from observed changes in the exogenous variables. Furthermore, we extend (Brækkan et al. in Eur Rev Agric Econ 45:531–552, 2018) approach for computing unexplained demand shifts by also calculating unexplained shifts in supply. This bridges the gap between comparative statics and simultaneous econometric models. Unexplained supply and demand shifts account for the unexplained variation in the endogenous variables. The data used in this application are from the US broiler chicken market.