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Market Behaviour - Part 6

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Summing up "Marshall" - Marshallian theory of the firm incoherent. Monopoly/perfect competition distinction based on mathematical fallacy. Atomistic competition leads to same output as monopoly (if costs comparable … another problematic issue!). Rational profit-maximising incompatible with welfare maximization. Can’t achieve welfare ideal of Marginal Cost = Price of firms profit-maximise. Theory not saved by more complicated Cournot-Nash game theoretic – See Keen and Standish 2010.

PC prices at same level as monopoly. Profit maximization incompatible with welfare maximization. General equilibrium analysis invalidated. Monopoly better than competition according to corrected neoclassical theory: same aggregate pricing policy (MR = MC), lower costs via economics of scale. Theory is a shambles – Deadweight loss of monopoly actually deadweight loss of profit maximization. Supply curve doesn’t exist.

Supply curve exists if and only if firms set P = MC. Mankiw’s animation.
Can’t derive supply curve unless firms set P = MC. Profit maximisers don’t set P = MC. Collective outcome same as monopoly: industry MR = MC.
Can’t derive supply independent of demand curve. Supply-demand analysis becomes impossible. This is why neoclassical economists are obsessed with “perfect competition.”
Monopoly better than perfect competition if costs lower (as is likely).

We started with definition of rational consumer. Found it was: Empirically false or that 100% of people are irrational; Computationally impossible; Has problems of ermergence: Even if individuals behaved that way, market demand curves could have any shape at all.
Yet economists model entire economy as single Representative Agent!

And economists ignore problems in supply theory too ..This is rational??

Whatever rationality is, it isn’t what economists define it to be .. Need definition of rationality that makes sense: Before we describe some market behavior as rational and other as irrational; Clearly computational issue vital – Rational reasoning must allow decision-making in reasonable time; By definition, cannot involve optimal decision-making. Definition of rational wide open.

The 2nd Fallacy (second Proof)
The mathematical logic: What other firms do affects your profit: Even if you can’t control them; Even if they don’t react (game theory style) to what you do. So profit maximized by zero of total differential.
Conventional economic formula leaves out the n. Since P’(Q) negative, with rising (?) marginal cost and falling price, true profit maximizing q, a lot less than MR = MC level. Real MR for firm same as industry MR. Conventional formula only right for monopoly. Competitive profit maximisers produce same output level as monopoly (given comparable costs …)
An example (with constant MC; rising considered later);
Standard false neoclassical advice: equate MRi and MC. Output converges to PC result as number of firms increases (Stigler’s result).
Competitive industry produces monopoly level output at monopoly price. Industry output independent of number of firms. Similar result for other marginal cost function. Competitive outcome same as monopoly.