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:
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