<p>You are allowed to use logs in 2sls model. The reason why that article does not use logs is that the article assumes linear supply and demand.</p>
<p>At the beginning the author states:</p>
<blockquote>
<p>Consider the following supply and demand functions</p>
<p>Supply:<span class="math-container">$Q=\beta_1 P + \epsilon_s$</span></p>
<p>Demand: <span class="math-container">$Q=\alpha_1 P+ \alpha_2 I+ \epsilon_d$</span></p>
</blockquote>
<p>If the author would instead assumed supply and demand to have following form:
<span class="math-container">$Q=P^{\beta_1}$</span> and <span class="math-container">$Q=P^{\alpha_1}I^{\alpha_2}$</span> then taking logs would make sense but if the supply and demand are already assumed to be linear taking logs is unnecessary as you already have the right functional form and you can just directly apply linear model without log-linearizing it.</p>
<p>For example, <a href="https://www.sciencedirect.com/science/article/pii/S0022199615000045?casa_token=TjA110IieV4AAAAA:qdqqYbuBs0ws5dVScruaL5-WD-48t6EBXAt8nN67EGgV761bWIJvDyM0n8pw9we2hyVR9XpZEug" rel="nofollow noreferrer">Soderbery (2015)</a> who estimates import supply and demand elasticities uses logarithms and models his supply-demand system using 2sls model with log-log form.</p>

CC BY-SA 4.0
2020-09-15T19:53:51.953Z
2020-09-15T20:02:16.523Z
2020-09-15T20:02:16.523Z
1muflon1
<p>In an ols model demand ~ price , is it reasonable to use log-log for price and demand, but in a 2sls model does the logic remain the same?
I found <a href="http://rstudio-pubs-static.s3.amazonaws.com/195495_d47be7c818424a3c9bfa5452dd17c6c6.html" rel="nofollow noreferrer">articles</a> simply using 2sls without using a log to find the equilibrium, does that make sense?</p>

<microeconomics><econometrics>
Does a 2sls model use logarithm?
KMnJomuh
# Does a 2sls model use logarithm?

(Asked by: username_0 on 2020-09-15)

In an ols model demand ~ price , is it reasonable to use log-log for price and demand, but in a 2sls model does the logic remain the same?
I found [articles](http://rstudio-pubs-static.s3.amazonaws.com/195495_d47be7c818424a3c9bfa5452dd17c6c6.html) simply using 2sls without using a log to find the equilibrium, does that make sense?

**Tags:** microeconomics, econometrics

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## 1 answers

### Answer by username_1 on 2020-09-15. Score: 1

You are allowed to use logs in 2sls model. The reason why that article does not use logs is that the article assumes linear supply and demand.

At the beginning the author states:

> Consider the following supply and demand functions
>
> Supply:$Q=\beta\_1 P + \epsilon\_s$
>
> Demand: $Q=\alpha\_1 P+ \alpha\_2 I+ \epsilon\_d$

If the author would instead assumed supply and demand to have following form:
$Q=P^{\beta\_1}$ and $Q=P^{\alpha\_1}I^{\alpha\_2}$ then taking logs would make sense but if the supply and demand are already assumed to be linear taking logs is unnecessary as you already have the right functional form and you can just directly apply linear model without log-linearizing it.

For example, [Soderbery (2015)](https://www.sciencedirect.com/science/article/pii/S0022199615000045?casa_token=TjA110IieV4AAAAA:qdqqYbuBs0ws5dVScruaL5-WD-48t6EBXAt8nN67EGgV761bWIJvDyM0n8pw9we2hyVR9XpZEug) who estimates import supply and demand elasticities uses logarithms and models his supply-demand system using 2sls model with log-log form.


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