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An Industry-Equilibrium Analysis of the LeChatelier Principle

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  • Peter Arendorf Bache

    ()
    (Department of Economics and Business, Aarhus University)

  • Anders Laugesen

    ()
    (Department of Economics and Business, Aarhus University)

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    Abstract

    By considering firms operating in a perfectly- or monopolisticallycompetitive industry with free entry, we show that well-established results on the celebrated LeChatelier principle (LCP) do not extend into an endogenous competitive environment. For instance, labour demand may be more elastic in the short run (where capital is fixed) than in the long run even if capital and labour are either complements or substitutes in profits. This may also be true locally at a point of long-run equilibrium. A novel insight is that industry-equilibrium effects introduce an asymmetry such that the LCP may hold for wage increases but not for wage decreases. These results are important for the interpretation of estimated labour-demand elasticities. Finally, we show that the LCP may hold for the total industry labour demand in situations where it does not hold for the labour demand of individual firms.

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    Bibliographic Info

    Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2013-16.

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    Length: 19
    Date of creation: 04 Sep 2013
    Date of revision:
    Handle: RePEc:aah:aarhec:2013-16

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    Web page: http://www.econ.au.dk/afn/

    Related research

    Keywords: Complements; Substitutes; Monopolistic Competition; Industry Equilibrium; Labour Demand; LeChatelier Principle;

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    References

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    1. de Meza, David, 1981. ""Perverse" Long-run and Short-run Factor Demand Curves," Economica, London School of Economics and Political Science, vol. 48(191), pages 299-303, August.
    2. Paul Milgrom & John Roberts, . "The LeChatelier Principle," Working Papers 95007, Stanford University, Department of Economics.
    3. Roberts, Kevin, 1999. "Rationality and the LeChatelier Principle," Journal of Economic Theory, Elsevier, vol. 87(2), pages 416-428, August.
    4. John K.-H Quah, 2007. "The Comparative Statics of Constrained Optimization Problems," Econometrica, Econometric Society, vol. 75(2), pages 401-431, 03.
    5. Koebel, Bertrand M. & Laisney, François, 2010. "The aggregate Le Chatelier Samuelson principle with Cournot competition," ZEW Discussion Papers 10-009, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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