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A Theory of Supply Function Choice and Aggregate Supply

Author

Listed:
  • Joel P. Flynn
  • Georgios Nikolakoudis
  • Karthik Sastry

Abstract

Modern theories of aggregate supply are built on the foundation that firms set prices and commit to producing whatever the market demands. We remove this strategic restriction and allow firms to choose supply functions, mappings that describe the prices charged at each quantity of production. Theoretically, we characterize firms’ optimal supply function choices in general equilibrium and study the resulting implications for aggregate supply. Aggregate supply flattens under lower inflation uncertainty, higher idiosyncratic demand uncertainty, and less elastic demand. Quantitatively, our theory can rationalize the flattening of aggregate supply during the Great Moderation and steepening during the 1970s and 2020s.

Suggested Citation

  • Joel P. Flynn & Georgios Nikolakoudis & Karthik Sastry, 2025. "A Theory of Supply Function Choice and Aggregate Supply," NBER Working Papers 33711, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33711
    Note: EFG ME
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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