reduced form



  • noun a form of an equation where endogenous variables are only shown as functions of exogenous variables

Health Economics

  • (written as Reduced Form)

    The reduced form of a system of structural equations constituting a model of economic behaviour is simply the result of solving the system. This considerably cuts down on the visible complexity of a model. For example, take the very simple case of a linear supply and demand model having three equations, two behavioural for the endogenous variables D and S, and one equilibrium condition:

    D = a - bP,/p>

    S = c + dP

    D = S

    The reduced forms are (with a bit of elementary algebra):

    P = (a - c)/( d + b),

    Q = (da - bc)/( d + b)

    Of course, the reduced form's increased simplicity comes at a price - detail is lost and the detail may be important in understanding what is actually causing effects to happen. Then one may need a fuller structural equation approach.