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Differential Supply Systems

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IV.II.1 Differential supply systems

Under perfect competition the firm's marginal cost (with respect to input z) equals the price y of the output good (which is exogenously given since the firm is a price taker). Formally this implies

Differential Supply Systems


Suppose the firm sells m products z at prices y then total revenue (TR) can be written as


Furthermore, the share of revenue of product i and Divisia's volume index can be defined as



Since the firm operates under perfect competition and profit maximization (c.q. marginal returns equal marginal costs) it follows that for each product (IV.II.1-1) can be applied


A differential output supply system can be proved to be described by




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