Reduced Form
To find the reduced form, one must solve the equations for the endogenous variables. This reduces the system considerably. For instance, we know that the two right-hand sides of the equations are the same (both equal to Q), and hence . This can be written as, or . Thus, P is in fact a fixed number, independent of Q. Below, this number is called, while the similar number for Q is :
The structure of supply and demand has disappeared. The two coefficients are the reduced form coefficients. They are easily identified from data on Q and P. (However, the four structural form coefficients above can not be identified from data: the parameter identification problem.)
It is easily verified that:
Read more about this topic: Reduced Form
Famous quotes containing the words reduced and/or form:
“Man in general, if reduced to himself, is too wicked to be free.”
—Joseph De Maistre (17531821)
“Upon the whole, necessity is something, that exists in the mind, not in objects; nor is it possible for us ever to form the most distant idea of it, considerd as a quality in bodies. Either we have no idea of necessity, or necessity is nothing but that determination of thought to pass from cause to effects and effects to causes, according to their experiencd union.”
—David Hume (17111776)