How internal forces shape economic outcomes: The dynamics of the endogenous variable

The central role of the endogenous variable in economic models

In any economic system, there are magnitudes that are not determined externally, but rather emerge from the interactions inherent to the model. This refers to the endogenous variable, whose evolution completely depends on the internal mechanisms of the system. Unlike exogenous factors that impact from outside, the endogenous variable is generated and transformed by the dynamic relationships that occur within the same economic framework.

Understanding this concept is fundamental because it allows us to comprehend why certain economic outcomes are not arbitrary, but rather a logical consequence of the operational forces within the model.

Interaction Mechanisms: How Endogenous Variables Work in Practice

The balance between supply and demand

Let's imagine a market where buyers and sellers interact. The price and the quantity traded are endogenous variables in this context. Their behavior is not random: if demand increases while supply remains fixed, the price will naturally rise. Conversely, when supply expands without changes in demand, it will put downward pressure on prices. This movement is endogenous because it arises from the market's own dynamics, not from external decisions.

Business production as an endogenous system

Now let's consider a company that produces and sells goods. Its level of production, the income generated, and the profitability obtained function as interdependent endogenous variables. These magnitudes are affected by internal decisions: the installed capacity of the factory, the cost of raw materials, and the pricing structure adopted.

Let's assume the company invests in cutting-edge technology to expand its production capacity. This technological change will trigger chain reactions: it will increase production, potentially lower the unit cost, and all of this reverberates in the final profits. Each transformation is endogenous to the business system.

Endogenous variables in cryptographic ecosystems

In the cryptocurrency market, the most evident endogenous variable is the price of each digital asset. Its quotation does not fall from the sky: it is shaped by internal market variables such as transaction volume, the collective psychological behavior of investors, and the intensity of demand. When multiple buyers decide to acquire an asset simultaneously, the price responds by rising.

Another crucial endogenous parameter in proof-of-work networks is the hash rate. This indicator reflects the total computational power that miners dedicate to validating blocks. The hash rate is not fixed: it increases when more miners join the network and the reward becomes more competitive, and decreases when incentives are reduced. All of this occurs as a result of distributed decisions within the protocol.

Synthesis: The Internal Logic of Economic Systems

Endogenous variables constitute the dynamic core of any economic model. They are those magnitudes whose trajectory is completely determined by internal feedback mechanisms. Whether in a traditional goods market, in the operation of a company, or in the turbulent ecosystem of cryptocurrencies, each endogenous variable follows predictable relationships that emerge from the system itself.

Recognizing what the endogenous variables are allows us to anticipate changes, understand causalities, and comprehend why economic systems generate the results we observe. Essentially, the endogenous variable is the mirror in which the self-regulating nature of every economic process is reflected.