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Can Increasing an Input Price Increase Competitive Profits

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  • George W. Ladd

Abstract

The envelope theorem asserts that the effect of an input price change on firm profit equals the negative of the quantity of the input used. Students of policy, however, believe that an increase in an input price can result in decreased production and higher product price, and possibly even in higher profit. The theorem is partial equilibrium and is not applicable to situations in which a parametric change generates general equilibrium effects. Conditions are identified under which an input price change can change profit in the same direction. Increasing corn price can increase profits from livestock.

Suggested Citation

  • George W. Ladd, 1989. "Can Increasing an Input Price Increase Competitive Profits," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 11(1), pages 11-15.
    • Handle: RePEc:oup:revage:v:11:y:1989:i:1:p:11-15.
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    File URL: http://hdl.handle.net/10.1093/aepp/11.1.11
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