Hotelling's lemma

Hotelling's lemma is a result in microeconomics that relates the supply of a good to the profit of the good's producer. It was first shown by Harold Hotelling, and is widely used in the theory of the firm. The lemma is very simple, and can be stated:

Let $y(p)$ be a firm's net supply function in terms of a certain good's price ( $p$ ). Then:

y(p)= \frac {\partial \pi (p)}{\partial p}

for $\pi$ the profit function of the firm in terms of the good's price, assuming that $p>0$ and that derivative exists.

The proof of the theorem stems from the fact that for a profit-maximizing firm, the maximum of the firm's profit at some output $y^*(p)$ is given by the minimum of $\pi (p^*) - p^* y^*(p)$ at some price, $p^{*}$ , namely where $\frac {\partial \pi (p)}{\partial p} - y = 0$ holds. Thus, $y(p)= \frac {\partial \pi (p)}{\partial p}$ ; QED.

The proof is also a corollary of the envelope theorem.

References

Hotelling, H. (1932). "Edgeworth's taxation paradox and the nature of demand and supply functions". Journal of Political Economy. 40 (5): 577–616. doi:10.1086/254387. JSTOR 1822600.
Sakai, Y. (1974). "Substitution and Expansion Effects in Production Theory: The Case of Joint Production". Journal of Economic Theory. 9 (3): 255–274. doi:10.1016/0022-0531(74)90051-9.
Takayama, A. (1985). Mathematical Economics. New York: Cambridge University Press. pp. 141–144. ISBN 0-521-31498-4.
Varian, H. (1992). Microeconomic Analysis (3rd ed.). New York: W. W Norton. pp. 43–45. ISBN 0-393-95735-7.

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Hotelling's lemma

See also

References