Supply Theory Sans Profit-Maximization
Durham University - Department of Economics and Finance; Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 4018
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.
Number of Pages in PDF File: 18
Keywords: supply aggregation, stochastic supply function, stochastic consistency, weak axiom of profit maximization, stochastic supply inequality, law of supply
JEL Classification: D21working papers series
Date posted: March 2, 2009
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