Planned Shortages and Price Theory

Abstract

In economic literature it is frequently the case that one or more of the assumptions of a model are not stated explicitly. Sometimes this neglect is not serious, but it can be of the utmost importance. One such assumption is that the quantity demanded and the quantity supplied are the same. In the following it is shown that it can be profitable for a monopolist to intentionally supply less than is demanded. Thus the conventional monopolist of economic theory who produces and sells that output for which marginal cost and marginal revenue are equal can be shown to be failing to maximize profits. Furthermore, the cost function and the demand function are interdependent in a manner which prevents the usual separation of these functions. Indeed it is this interrelationship which makes shortages profitable for appropriate cost and revenue parameter values.