Inferring long-run supply elasticities from a short-run variable-revenue function

Abstract

Recent papers by Kulatilaka (1987, 1985) Squires (1987) and Hertel (1987), using the seminal exposition of Brown and Christensen (1981), which in turn is heavily derivative of the work of Lau (1976, 1978), have emphasised that either the short-run total cost function in the case of Kulatika or the short-run total profit function in the case of Hertel and Squires is a more general specification than their long-run counterparts. In other words, a specification of the cost or profit function in which one or more arguments are assumed fixed in the short run is more general than a specification which assumes that all factors or outputs adjust to their optimal cost minimisation or profit maximisation levels in the period of analysis which is predominantly one year in most studies. This powerful conclusion stems from the fact that long-run responses can be deduced solely from the estimated parameters of the short-run function.