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Title:Supply theory sans profit-maximization PDF Logo
Authors:Dasgupta, Indraneel
Issue Date:2009
Series/Report no.:IZA discussion papers 4018
Abstract:We utilize the analytical construct of a stochastic supply function to provide an aggregate representation of a finite collection of standard deterministic supply functions. We introduce a consistency postulate for a stochastic supply function that may be satisfied even if no underlying deterministic supply function is rationalizable in terms of profit maximization. Our consistency postulate is nonetheless equivalent to a stochastic expansion of supply inequality, which summarizes the predictive content of the traditional theory of competitive supply. A number of key results in the deterministic theory follow as special cases from this equivalence. In particular, it yields a probabilistic version of the law of supply, which implies the traditional specification. Our analysis thus provides a necessary and sufficient axiomatic foundation for a de-coupling of the predictive content of the classical theory of competitive firm behavior from its a priori roots in profit maximization, while subsuming the traditional theory as a special case.
Subjects:Supply aggregation
stochastic supply function
stochastic consistency
weak axiom of profit maximization
stochastic supply inequality
law of supply
JEL:D21
Persistent Identifier of the first edition:urn:nbn:de:101:1-20090304744
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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