Re: Response to Davidson

[Peter Skott <ecoskott@xxxxxxxxxxxxxx>]

Paul Davidso writes:

>I want to explain employment in a market economy
>where entrepreneurs are the primary employers of workers, i.e., why
>do entrepreneurs hire N1 workers instead of N2 (or any other N-
>quantity)? If we assume entrepreneurs have to be motivated by
>something, i.e., they are not robots merely programmed to hire no
>matter what the circumstances, then we must know what is the
>minimum of something that motivates the entrepreneur to engage in
>hiring and producting different quantities, or what economists call
>the supply conditions.

We all want to explain employment in a market economy.

>     Assuming profit maximization in pure competition, the marginal
>cost curve PLUS the (expected) market DEMAND elasticity conditions
>(i.e., an (expected) perfectly elastic demand curve facing the
>firm) for all alternative circumstances must be combined to convert
>the mc curve into the SUPPLY curve. For profit maximizing
>entrepreneurs facing alternative perfectly elastic demand curves,
>the marginal cost curve (from its intersection with the minimum of
>the avc curve) represents the minimum price necessary to motivate
>entrepreneurs.

Does anyone disagree?

>The imperfect competition firm's supply curve
>requires the same specification of marginal costs PLUS alternative
>(expected) market demand curves.

Correct, except that "supply curve" should be replaced by "supply
decision".

>If we assume, as the purely
>competitive case does, that the elasticity of alternative demand
>curves are always the same -- (see Skott's earlier posting where
>he makes that specific assumption to explain a supply curve that
>has a constant mark-up over labor costs) -- then for imperfectly
>competitive firm its supply curve can be uniquely specified given
>the marginal cost conditions PLUS expected alternative market
>demand elasticity conditions.

This is either incorrect or very sloppy language.
If I specify a marginal cost function and an elasticity of demand
then this doesn't enable Paul Davidson or anybody else to derive
a supply curve.
The profit maximizing output decision depends on the position of
the (conjectured) demand curve. In the case of perfect competition
this position can be fully described by the price. Hence, we get
a supply curve linking output to price. Under imperfect competition
the position of the demand curve cannot be described simply
by a price. If the elasticity of demand is constant, one needs
to know both the value of this elasticity and a point on the curve, that is a
price-output combination. (In general it is not even the case
that knowledge of the demand elasticity, the cost conditions and
the firm's profit-maximizing choice of price will enable one to
derive the profit-maximizing level of output).
Obviously, this doesn't imply that "there is no organizing principle
to explain how much any firm will hire for alternative (expected)
market demand conditions given the marginal cost conditions". Supply
decisions do depend on demand expectations but since the position
of the demand curve cannot be
fully described by a price, the profit-maximizing output cannot
be expressed as a simple function of price either.

>If you are going to claim
>supply conditions in an imperfectly competitive world can not
>generate a supply curve, but only a supply point -- as most
>microtextbooks claim -- then please recognize that you are assuming
>that the demand curve facing each imperfectly competitive firm is
>fixed;

I do not - and never did - make this claim (and I'm not sure what
textbooks Paul Davidson refers to). There is a supply point for any
given specification of the (conjectured) demand curve.

>     Until you willing to admit that as macroeconomists we cannot
>shift aggregate demand curves (for employment creating policy)
>relative to aggregate supply curves unless we are also shifting,
>on average, all microdemand curves RELATIVE to firms' microSUPPLY
>curves, then you are in a "logical muddle".

Did anyone ever disagree with this?

>you will be forced, if you use a
>logically consistent analysis with a crisp Marshallian lexicon, to
>discuss SPOT market prices relative to firms' FORWARD (or short-
>run) flow-supply price curve to explain how entrepreneurs are
>motivated to change their flow-supply production and hiring
>decisions. In a crisp clear exposition, demand expectations are
>part of each firm's supply curve just as much as marginal costs
>(assuming profit maximizing).

Under imperfect competition the reference to "supply curve" and the
exclusive focus on spot and forward prices represent either sloppy
language or an implicit focus on special cases in which the terms are
well-defined. However, we agree on the substance: demand expectations
are part of each firm's supply DECISIONS as much as marginal costs.

Cheers,
Peter Skott
University of Aarhus
ecoskott@xxxxxxxxxxxxxx