Endogenous Variable

Published Mar 20, 2023

Definition of Endogenous Variable

An endogenous variable is a variable that is influenced or determined by other variables within a particular model or economic system. In other words, it changes based on the values of other variables in the system. Endogenous variables are also known as dependent variables.

Example

To understand the concept of an endogenous variable, consider a simple supply and demand model for a product. The quantity demanded and the quantity supplied are two essential variables that determine the market price of the product. In this model, the market price is an endogenous variable because it is determined by the interaction between demand and supply.

Assume that the demand for the product increases due to an increase in consumer income. This increase in demand results in a higher market price, which in turn affects the quantity of the product supplied by the producers. As a result, an increase in demand leads to an increase in market price, which then affects the quantity supplied, making the price an endogenous variable.

Why Endogenous Variables Matter

Endogenous variables play a crucial role in modeling economic systems and understanding how they function. By identifying the relationships between different variables, economists can develop models that show how changes in one variable can have a cascading effect on the entire system.

It is important to note that endogenous variables are not always easy to determine, as they can be influenced by a variety of other factors outside of the model. However, by recognizing the importance of endogenous variables in economic analysis, economists can create more accurate models that better reflect the way that real-world systems function.