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A shopkeeper economy

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  • Daniel P. Murphy

Abstract

This paper investigates the properties of an economy populated by shopkeepers who monopolistically provide differentiated services at zero marginal cost but positive fixed costs. In this setting, equilibrium output and wealth depend on consumer demand rather than available supply. The ?shopkeeper economy? is compared to a standard production-based economy in which wealth is a function only of labor supply and technology. I demonstrate that the existence of producers who face only fixed costs provides a counterexample to the notion that ?supply creates its own demand.?

Suggested Citation

  • Daniel P. Murphy, 2013. "A shopkeeper economy," Globalization Institute Working Papers 158, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:158
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    References listed on IDEAS

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    1. Burnside, Craig & Eichenbaum, Martin & Rebelo, Sergio, 1993. "Labor Hoarding and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 245-273, April.
    2. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151-1199.
    3. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70(6), pages 538-538.
    4. Murphy, Daniel, 2013. "Why are Goods and Services more Expensive in Rich Countries? Demand Complementarities and Cross-Country Price Differences," Working Papers 636, Research Seminar in International Economics, University of Michigan.
    5. Christopher J. Nekarda & Valerie A. Ramey, 2020. "The Cyclical Behavior of the Price‐Cost Markup," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 319-353, December.
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