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.
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number
4018.
Length: 2009 pages Date of creation: Feb 2009 Date of revision: Publication status: published in: The BE Journal of Theoretical Economics: Contributions, 2009, 9(1), Article 26 Handle: RePEc:iza:izadps:dp4018
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