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14 CHAPTER 1 ANALYZING ECONOMIC PROBLEMS

Price (toman per kilogram) 5,300 S 2 S 1

FIGURE 1.3 Comparative Statics in the Market for 4,200
Pistachio Nuts
The drought and cold weather in Iran in the spring of
2008 caused a leftward shift in the world’s supply curve D
for pistachio nuts from S 1 to S 2 . The equilibrium price of
pistachio nuts rose from 4,200 toman per kilogram to Q 2 Q 1
5,300 toman per kilogram. The equilibrium quantity of
Quantity (tons)
pistachio nuts decreased from Q 1 to Q 2 .

page 5.) Comparative statics analysis can be applied to constrained optimization
problems or to equilibrium analyses. Comparative statics allows us to do a “before-
and-after” analysis by comparing two snapshots of an economic model. The first
snapshot tells us the levels of the endogenous variables given a set of initial values of
exogenous variables. The second snapshot tells us how an endogenous variable we
care about has changed in response to an exogenous shock—that is, a change in the
level of some exogenous variable.
Let’s consider an example of how comparative statics might be applied to a
model of equilibrium: the market for pistachio nuts. The world’s largest producer
of pistachio nuts is Iran. Pistachio nuts are an extremely important product for
Iran: after oil, pistachio nuts are its largest export commodity, generating more
than $1 billion in earnings in 2007. In the spring of 2008, a combination of a se-
vere drought and unusually cold weather caused Iran’s production of pistachio nuts
8
to decrease to one-third of what it had been in 2007. As a result of this exogenous
shock, the price of pistachio nuts rose from 4,200 toman per kilogram in 2007 to
5,300 toman per kilogram in 2008, an increase of 26 percent (approximately 900
toman equals 1 U.S. dollar).
We can use comparative statics analysis to illustrate what happened in the world
market for pistachio nuts. In a typical year such as 2007, the supply curve would have
been S 1 and the demand curve would have been D, as shown in Figure 1.3. Under
these circumstances, the equilibrium price (an endogenous variable) would be 4,200
toman per kilogram, and the equilibrium quantity (also an endogenous variable)
would be Q . The drought and cold weather in Iran in 2008 led to a leftward shift in
1
the world’s supply curve for pistachio nuts from S to S . Because worldwide consumer
1
2
demand for pistachio nuts is likely to be unaffected by the presence of drought and
cold weather in Iran, it is reasonable to assume that the demand curve for pistachio
nuts did not change as a result of these weather shocks. As Figure 1.3 shows, the shift

8 “Iran Pistachio Prices Soar in Wake of Frost Damage,” BBC Monitoring Middle East (May 1, 2008).