Supply Theory sans Profit-Maximization

Indraneel Dasgupta ()

No 4018, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: supply aggregation; stochastic consistency; stochastic supply inequality; stochastic supply function; law of supply; weak axiom of profit maximization (search for similar items in EconPapers)
JEL-codes: D21 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2009-02
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Citations: View citations in EconPapers (3)

Published - published in: B.E. Journal of Theoretical Economics: Contributions to Theoretical Economics, 2009, 9 (1), Article 26

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