The Profitable Theory of the Firm
28 Pages Posted: 23 Jun 2008 Last revised: 9 Oct 2008
Date Written: August 2008
Abstract
This paper shows that the mathematics of the neoclassical theory of the firm is inconsistent, that constant returns-to-scale is a linear algebra misspecification, that minimum average cost is not an efficiency measure, and that the short run marginal cost curve is not a supply curve. A consistent model is developed that emphasizes upgrade of efficiency, rather than mere efficiency. Higher efficiency leads to huge profit of a perfectly competitive firm. Another consistent model for monopoly is also developed which shows that a monopoly operates only on the demand curve, and any regulation must end up with lower welfare.
Keywords: Constant returns to scale, Zero Profit, Marginal cost, Production efficiency, Allocative efficiency, Monopoly, Monopsony, Output supply, Factor demand.
JEL Classification: D21, D24
Suggested Citation: Suggested Citation