Asymmetries in price and quantity adjustments by the competitive firm
- 1 August 1982
- journal article
- Published by Elsevier BV in Journal of Economic Theory
- Vol. 27 (2), 410-420
- https://doi.org/10.1016/0022-0531(82)90037-0
Abstract
Focusing on the crucial role of inventory carry-overs in the production and sales decision, we describe the profit maximizing behavior of a dynamic competitive firm facing random prices. Each firm's behavior is incorporated into a stochastic equilibrium model of the competitive industry with uncertain demand. The industry model exhibits asymmetric cyclical fluctuations of the “Keynesian” sort: when demand is weak, output contracts while price holds at a fixed floor; when demand is strong, price increases as output is constrained by a ceiling. Even in a pure world of constant returns, without increasing costs, the inability to instantaneously coordinate production and sales along with the existence of inventories is sufficient to yield a “backward L ” shaped supply curve for the short run.Keywords
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