Comparing Supply Systems Derived from a Symmetric Generalized McFadden Profit Function to Isoelastic Supply Systems: Costs and Benefits

A major drawback of constant elasticity supply and demand systems, which are widely used in simulation models for applied policy analysis, is that they can’t be restricted to globally comply with certain conditions implied by economic theory. This paper compares constant elasticity systems to supply and demand systems derived from second order flexible functional forms (FFFs). Furthermore, supply systems in the model CEEC-ASIM, which are derived from a specific FFF, the Symmetric Generalized McFadden (SGMF) profit function, are assessed and compared to constant elasticity supply specifications which exhibit the same supply elasticities at the point of calibration.