Limitations of Comparative Statics
Comparative statics suffers from certain limitations. It cannot be used to tackle two types of problems: (a) It fails to predict the path which the market follows when moving from one equilibrium position to another. and (b) it cannot predict whether or not a given equilibrium position will ever be achieved. For these purposes we need dynamic analysis. Prof, Tina Organ has pointed out that such an analysis is possible only under two circumstances: Firstly, when we arc interested in the long run tendencies. when the movement produced the changes in the data arc damped and the data do not themselves undergo a change. Under such circumstances, the final position or equilibrium will be independent or tunc or the path traversed the economy. Secondly. such an analysis when the change in data brings about enunciate adaptation of the economic magnitudes so that the new data do not take time to produce the results. Under such conditions. too, it i~ possible to ignore the time element.
Keynes’s technique or shifting equilibrium is based upon the method of comparative . The Keynesian model predicts that an upward shift in the investment function will cause a rise in the level of income, a rise in the level of saving. and a rise in the late of interest. At the original level or income, investment exceeds saving. Equilibrium is restored hy the rise in saving resulting In un the rise or income. and hy the fall in investment resulting from the rise in interest rates, Similarly. the Keynesian theory predicts that a fall in the transactions demand for cash will cause a rise in income, a fall in interest rate will lower the rate. raise income and saving and investment Such are the shirts that Keynes studies with the aid of comparative statics.