Structural Equations


Health Economics

  • Structural equations specify the key causal pathways from cause to effect in economic models. A simple example is the 'supply and demand' model, in which supply is hypothesized to rise as price rises (ceteris paribus), demand to fall as price rises (ceteris paribus) and in which an equilibrium is predicted to be established (instantaneously in the simplest of models) as excess demand or excess supply at particular non-equilibrium prices pushes price up or down to the equilibrium price. In this model the structural equations are (assuming them to be linear):

    D = a - bP

    S = c + dP

    D = S

    And the equilibrium price is thus (a - c)/( d + b), where D is the rate of demand, S the rate of supply and P is price. The lower case letters are parameters.