Working Paper: CEPR ID: DP11119
Authors: J. Peter Neary; Monika Mrazova
Abstract: 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.
Keywords: heterogeneous firms; passthrough; quantifying responses to trade liberalization; super and subconvexity; supermodularity
JEL Codes: F23; F15; F12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand manifold (C39) | firm behavior (D21) |
| demand structure (D49) | firm behavior (D21) |
| elasticity of demand (D12) | firm markups (D43) |
| subconvex demand (D11) | higher elasticity (H30) |
| higher elasticity (H30) | lower profit margins (L21) |
| curvature of demand function (D11) | slope of marginal revenue (D40) |
| demand manifold (C39) | predictions about firm responses to external shocks (D22) |