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Supply Theory sans Profit Maximization

Author

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  • Dasgupta Indraneel

    (Durham University, indraneel@cssscal.org)

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.

Suggested Citation

  • Dasgupta Indraneel, 2009. "Supply Theory sans Profit Maximization," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-16, July.
  • Handle: RePEc:bpj:bejtec:v:9:y:2009:i:1:n:26
    DOI: 10.2202/1935-1704.1571
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    References listed on IDEAS

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    1. Indraneel Dasgupta, 2005. "Consistent firm choice and the theory of supply," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(1), pages 167-175, July.
    2. Bandyopadhyay, Taradas & Bandyopadhyay, Bandyopadhyay & Pattanaik, Prasanta K., 2002. "Demand Aggregation and the Weak Axiom of Stochastic Revealed Preference," Journal of Economic Theory, Elsevier, vol. 107(2), pages 483-489, December.
    3. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    4. Taradas Bandyopadhyay & Indraneel Dasgupta & Prasanta Pattanaik, 2004. "A general revealed preference theorem for stochastic demand behavior," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(3), pages 589-599, March.
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    8. Daniel McFadden, 2005. "Revealed stochastic preference: a synthesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(2), pages 245-264, August.
    9. Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-597, May.
    10. Bandyopadhyay, Taradas & Dasgupta, Indraneel & Pattanaik, Prasanta K., 1999. "Stochastic Revealed Preference and the Theory of Demand," Journal of Economic Theory, Elsevier, vol. 84(1), pages 95-110, January.
    11. Indraneel Dasgupta & Prasanta Pattanaik, 2007. "‘Regular’ choice and the weak axiom of stochastic revealed preference," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(1), pages 35-50, April.
    12. Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-275, March-Apr.
    13. Varian, Hal R., 1985. "Non-parametric analysis of optimizing behavior with measurement error," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 445-458.
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    Cited by:

    1. Indraneel Dasgupta, 2011. "Contraction consistent stochastic choice correspondence," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 37(4), pages 643-658, October.
    2. Dasgupta Indraneel & Pattanaik P. K, 2010. "Revealed Preference with Stochastic Demand Correspondence," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-21, August.
    3. Jan Heufer, 2009. "Stochastic homothetically revealed preference for tight stochastic demand functions," Economics Bulletin, AccessEcon, vol. 29(3), pages 2472-2477.
    4. Jan Heufer, 2011. "Stochastic revealed preference and rationalizability," Theory and Decision, Springer, vol. 71(4), pages 575-592, October.

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    More about this item

    Keywords

    supply aggregation; stochastic supply function; stochastic consistency; weak axiom of profit maximization; stochastic supply inequality; law of supply;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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