Effective demand versus profit maximization in aggregate demand/supply analysis: a dynamic perspective

Abstract

Today many textbooks use the aggregate demand/aggregate supply analysis to convey the basics of Keynesian analysis of aggregate demand in conjunction with the profit maximisation postulate as characterising the aggregate supply side. However, this construction suffers from logical inconsistency, as the assumption of profit maximisation constraining firms through rising marginal costs of the ‘supply side’ is not easy to reconcile with the Keynesian postulate of output constrained by aggregate demand. This work follows a prominent line of reasoning to abandon the conventional AD curve altogether and replace it with a construct which seeks to remedy the inconsistency. This is achieved by assigning the central role to profit maximisation on the supply side, while the role of effective demand in the output determination is pushed to the background.

Keywords

• Austria
• Analysis
• Supply and demand
• Keynesian economics