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A shopkeeper economy

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  • Murphy, Daniel P.

    (Darden School of Business, University of Virginia)

Abstract

This paper investigates the properties of an economy populated by shopkeepers who monopolistically provide differentiated services at zero marginal cost but positive fixed costs. In this setting, equilibrium output and wealth depend on consumer demand rather than available supply. The “shopkeeper economy” is compared to a standard production-based economy in which wealth is a function only of labor supply and technology. I demonstrate that the existence of producers who face only fixed costs provides a counterexample to the notion that “supply creates its own demand.”

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File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0158.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 158.

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Length: 17 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:fip:feddgw:158

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Related research

Keywords: Production (Economic theory); Capital investments;

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  1. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-73, April.
  2. Murphy, Daniel, 2013. "Why are Goods and Services more Expensive in Rich Countries? Demand Complementarities and Cross-Country Price Differences," Working Papers 636, Research Seminar in International Economics, University of Michigan.
  3. Christopher J. Nekarda & Valerie A. Ramey, 2013. "The Cyclical Behavior of the Price-Cost Markup," NBER Working Papers 19099, National Bureau of Economic Research, Inc.
  4. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
  5. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
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