Topic: Economic Statics and Dynamics

In this post, you'll know the basic theory of Economic Statics & Dynamics.

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Economic Statics:

The task of economic theory is to explain the functional relationships between systems of economic variables. A functional relationship between variables is said to be static if values of the economic variables relate to the same point of time or to the same period of time.

Example:

The law of demand: It is the functional relationship between the quantity demanded of a good and price of that good at a given moment or period of time. This law states that, other things remaining the same, the quantity demanded varies inversely with price at a given point or period of time.

Importance of Economic Statics:

The following are the importance of economic statics:

• For Investigation: The traditional economists assumed static conditions for purposes of investigation. They studied the activities of individual firms, industries and consumers for the understanding of social phenomena.
• To Solve Complex Problems: In economic statics one studies how an individual distributes his limited money income among various commodities in order to obtain maximum satisfaction. The significance of static analysis lies in solving these complex problems.
• Expectations: Expectations generally fall within the purview of economic dynamics. But the effects of a once-over change in expectations are handled by the technique of static economics.

Economic Dynamics:

Economic dynamics is the study of change, of acceleration or deceleration. According to Prof. Ackley, “Dynamics is concerned essentially with states of disequilibrium and with change.” It is the analysis of the process of change which continues through time or over time.

Example:

The population of a country may increase at a rate of 2% in the first year; 3% in the second year and 5% in the third year, if the other economic variables change at unequal rates, the rate of output will also change at different times. In a dynamic state, there is uncertainty of every change. So, it is not possible to make correct predictions and we use economic dynamics in order to study these changes.

Importance of Economic Dynamics:

• Realistic: It explains the causes and effects of changing economic phenomena and enables us to see a moving picture of the working of an economy how the economy develops in one period out of the preceding period.
• In Business Cycles: The study of economic dynamics is imperative for presenting a realistic analysis of secular growth, speculation and cyclical fluctuations, because they all involve the element of time.
• Problems of Economic Growth: Problems involving time-lags, rates of growth and sequence analysis require the use of dynamic relationships. The importance of dynamic analysis lies in studying the process of economic development whether in the short or the long run.