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Abstract
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.