Adjustment Costs and the Theory of Supply

T ills paper contains a re-examination from a dynamic point of view of some familiar problems in the theory of supply. In particular, it is concerned with the response of firms in a competitive industry to once-and-for-all shifts in the industry demand curve, to changes in the rate of shift in this demand curve, and to changes in the prices of factors of production. In most respects, our discussion of these issues will proceed along the lines of the traditional Marshall-Viner theory of supply. The novelty of our treatment will lie in its attempt to introduce the relative "fixity" of capital explicitly into the formulation of the firm's maximum problem and to use this formulation to obtain a precise definition of the industry's "shortrun" and "long-run" equilibrium posi