General Equilibrium Analysis of the Supply of Capital

Yi Wen

Working Papers from Cornell University, Center for Analytic Economics

Abstract: The point of this paper is that if output is durable then optimal behavior of a supplier is characterized by production smoothing. Durability of goods (such as capital) has opposite effects on the supply of the goods. Higher durability on the one hand raises the variability of investment demand for the goods by lowering the user's cost, which tends to raise the variability of supply; on the other hand it lowers the expected future demand for the goods, which tends to reduce the variability of supply. These opposite effects of durability manifest in economies where suppliers of durable goods opt to use inventories to buffer demand shocks. Due to inventory adjustment and rational expectation, the variability of production can be reduced both absolutely and relative to sales if output is durable.

JEL-codes: E22 E23 E32 (search for similar items in EconPapers)
Date: 2004-01
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:corcae:04-02

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