DP11119 Not So Demanding: Demand Structure and Firm Behavior

Author(s): Monika Mrázová, J Peter Neary
Publication Date: February 2016
Keyword(s): Heterogeneous Firms, Pass-Through, Quantifying Responses to Trade Liberalization, Super- and Sub-Convexity, Supermodularity
JEL(s): F12, F15, F23
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11119

We show that any well-behaved demand function can be represented by its demand manifold, a smooth curve which relates the elasticity and convexity of demand. This manifold is a sufficient statistic for many comparative statics questions; leads naturally to characterizations of new families of demand functions which nest most of those used in applied economics; and connects assumptions about demand structure with firm behavior and economic performance. In particular, we show that the demand manifold leads to new insights about industry adjustment with heterogeneous firms, and provides a quantitative framework for measuring the effects of globalization.