WEBVTT NOTE 4.06. Interrelations among the Prices of Consumers’ Goods 1 00:00:00.000 --> 00:00:07.000 6. Interrelations Among the Prices of Consumers' Goods 2 00:00:07.000 --> 00:00:19.000 Thus, at any given point in time, the consumer is confronted with the previously existing money prices of the various consumers' goods on the market. 3 00:00:19.000 --> 00:00:27.000 On the basis of his utility scale, he determines his rankings of various units of the several goods and of money, 4 00:00:27.000 --> 00:00:33.120 of Money and these rankings determine how much money he will spend on each of the various 5 00:00:33.120 --> 00:00:34.120 goods. 6 00:00:34.120 --> 00:00:40.440 Specifically, he will spend money on each particular good until the marginal utility 7 00:00:40.440 --> 00:00:46.640 of adding a unit of the good ceases to be greater than the marginal utility that its 8 00:00:46.640 --> 00:00:50.640 money price on the market has for him. 9 00:00:50.640 --> 00:00:55.160 This is the law of consumer action in a market economy. 10 00:00:55.160 --> 00:01:01.800 As he spends money on a good, the marginal utility of the new units declines, while the 11 00:01:01.800 --> 00:01:09.340 marginal utility of the money foregone rises until he ceases spending on that good. 12 00:01:09.340 --> 00:01:15.480 In those cases where the marginal utility of even one unit of a good is lower than the 13 00:01:15.480 --> 00:01:34.480 In this way are determined the individual demand schedules for each good, and consequently the aggregate market demand schedules for all buyers. 14 00:01:34.480 --> 00:01:42.480 The position of the market demand schedule determines what the market price will be in the immediate future. 15 00:01:42.480 --> 00:01:49.360 Thus if we consider action as divided into periods consisting of days, then the individual 16 00:01:49.360 --> 00:01:55.800 buyers set their rankings and demand schedules on the basis of the prices existing at the 17 00:01:55.800 --> 00:02:02.720 end of day one, and these demand schedules determine what the prices will be by the end 18 00:02:02.720 --> 00:02:05.200 of day two. 19 00:02:05.200 --> 00:02:12.320 The listener is now referred back to the discussion in Chapter 2, Sections 9 and 10. 20 00:02:12.320 --> 00:02:19.120 The analysis, there applied to barter conditions, applies to money prices as well. 21 00:02:19.120 --> 00:02:25.260 At the end of each day, the demand schedules, or rather the total demand schedules, and 22 00:02:25.260 --> 00:02:32.180 the stock in existence on that day, set the market equilibrium price for that day. 23 00:02:32.180 --> 00:02:38.100 In the money economy, these factors determine the money prices of the various goods during 24 00:02:38.100 --> 00:02:39.620 that day. 25 00:02:39.620 --> 00:02:45.840 The analysis of changes in the prices of a good, set forth in Chapter 2, is directly 26 00:02:45.840 --> 00:02:47.760 applicable here. 27 00:02:47.760 --> 00:02:54.000 In the money economy, the most important markets are naturally continuous, as goods continue 28 00:02:54.000 --> 00:02:57.140 to be produced in each day. 29 00:02:57.140 --> 00:03:03.220 Changes in supply and demand schedules, or changes in total demand schedules and quantity 30 00:03:03.220 --> 00:03:09.160 of Stock have exactly the same directional effect as in barter. 31 00:03:09.160 --> 00:03:15.500 An increase in the market's total demand schedule over the previous day tends to increase 32 00:03:15.500 --> 00:03:18.140 the money price for the day. 33 00:03:18.140 --> 00:03:23.660 An increase in stock available tends to lower the price, etc. 34 00:03:23.660 --> 00:03:29.380 As in barter, the stock of each good at the end of each day has been transferred into 35 00:03:29.380 --> 00:03:39.200 Up to this point we have concentrated on the determination of the money price of each consumer's 36 00:03:39.200 --> 00:03:45.080 good without devoting much attention to the relations among these prices. 37 00:03:45.080 --> 00:03:48.480 The interrelationships should be clear, however. 38 00:03:48.480 --> 00:03:54.040 The available goods are ranked along with the possibility of holding the money commodity 39 00:03:54.040 --> 00:03:59.360 in one's cash balance on each individual's value scale. 40 00:03:59.360 --> 00:04:05.400 and in accordance with the rankings and the law of utility, the individual allocates his 41 00:04:05.400 --> 00:04:12.480 units of money to the most highly valued uses, the various consumer's goods, investment 42 00:04:12.480 --> 00:04:17.280 in various factors and addition to his cash balance. 43 00:04:17.280 --> 00:04:22.800 Let us here set aside the question of the distribution chosen between consumption and 44 00:04:22.800 --> 00:04:29.320 Investment and the Question of Addition to the Cash Balance until Later Chapters and 45 00:04:29.320 --> 00:04:36.040 Consider the Interrelations Among the Prices of Consumers' Goods Alone. 46 00:04:36.040 --> 00:04:42.880 The law of the interrelation of consumers' goods is, the more substitutes there are available 47 00:04:42.880 --> 00:04:49.780 for any given good, the more elastic will tend to be the demand schedules, individual 48 00:04:49.780 --> 00:04:52.880 and Market for that Good 49 00:04:52.880 --> 00:04:59.560 By the definition of good, two goods cannot be perfect substitutes for each other, since 50 00:04:59.560 --> 00:05:06.720 if consumers regarded two goods as completely identical, they would, by definition, be one 51 00:05:06.720 --> 00:05:07.720 good. 52 00:05:07.720 --> 00:05:14.360 All consumers' goods are, on the other hand, partial substitutes for one another. 53 00:05:14.360 --> 00:05:20.880 When a man ranks in his value scale the myriad of goods available and balances the diminishing 54 00:05:20.880 --> 00:05:27.920 utilities of each, he is treating them all as partial substitutes for one another. 55 00:05:27.920 --> 00:05:34.960 A change in ranking for one good by necessity changes the rankings of all the other goods, 56 00:05:34.960 --> 00:05:38.840 since all the rankings are ordinal and relative. 57 00:05:38.840 --> 00:05:45.240 A higher price for one good, owing, say, to a decrease in stock produced, will tend to 58 00:05:45.240 --> 00:05:51.680 shift the demand of consumers from that to other consumers' goods, and therefore their 59 00:05:51.680 --> 00:05:55.160 demand schedules will tend to increase. 60 00:05:55.160 --> 00:06:02.560 Conversely, an increased supply and a consequent lowering of price for a good will tend to 61 00:06:02.560 --> 00:06:09.000 to shift consumer demand from other goods to this one and lower the demand schedules 62 00:06:09.000 --> 00:06:14.540 for the other goods, for some, of course, more than for others. 63 00:06:14.540 --> 00:06:21.700 It is a mistake to suppose that only technologically similar goods are substitutes for one another. 64 00:06:21.700 --> 00:06:27.900 The more money consumers spend on pork, the less they have to spend on beef, or the more 65 00:06:27.900 --> 00:06:33.300 For money they spend on travel, the less they have to spend on TV sets. 66 00:06:33.300 --> 00:06:38.840 Suppose that a reduction in its supply raises the price of pork on the market. 67 00:06:38.840 --> 00:06:44.860 It is clear that the quantity demanded and the price of beef will be affected by this 68 00:06:44.860 --> 00:06:46.140 change. 69 00:06:46.140 --> 00:06:53.020 If the demand schedule for pork is more than unitarily elastic in this range, then the 70 00:06:53.020 --> 00:06:58.980 The higher price will cause less money to be spent on pork, and more money will tend 71 00:06:58.980 --> 00:07:02.940 to be shifted to such a substitute as beef. 72 00:07:02.940 --> 00:07:09.460 The demand schedules for beef will increase, and the price of beef will tend to rise. 73 00:07:09.460 --> 00:07:15.700 On the other hand, if the demand schedule for pork is inelastic, more consumers' money 74 00:07:15.700 --> 00:07:22.780 will be spent on pork, and the result will be a fall in the demand schedule for beef, 75 00:07:22.780 --> 00:07:25.860 and, consequently, in its price. 76 00:07:25.860 --> 00:07:33.020 Such interrelations of substitute goods, however, hold true in some degree for all goods, since 77 00:07:33.020 --> 00:07:39.780 all goods are substitutes for one another, for every good is engaged in competing for 78 00:07:39.780 --> 00:07:42.620 the consumer's stock of money. 79 00:07:42.620 --> 00:07:48.340 Of course, some goods are closer substitutes than others, and the interrelations among 80 00:07:48.340 --> 00:07:51.480 them will be stronger than among the others. 81 00:07:51.480 --> 00:07:57.000 The closeness of the substitution depends, however, on the particular circumstances of 82 00:07:57.000 --> 00:08:03.080 the consumer and his preferences, rather than on technological similarity. 83 00:08:03.080 --> 00:08:10.260 Thus, consumers' goods, in so far as they are substitutes for one another, are related 84 00:08:10.260 --> 00:08:11.880 as follows. 85 00:08:11.880 --> 00:08:18.040 When the stock of A rises and the price of A therefore falls, 1. 86 00:08:18.040 --> 00:08:25.120 If the demand schedule for A is elastic, there will be a tendency for a decline in the demand 87 00:08:25.120 --> 00:08:33.600 schedules for B, C, D, etc., and consequent declines in their prices. 88 00:08:33.600 --> 00:08:34.760 2. 89 00:08:34.760 --> 00:08:41.640 If the demand schedule for A is inelastic, there will be a rise in the demand schedules 90 00:08:41.640 --> 00:08:49.000 for B, C, D, etc. and a consequent rise in their prices. 91 00:08:49.000 --> 00:08:50.000 3. 92 00:08:50.000 --> 00:08:57.040 If the demand schedule has exactly neutral or unitary elasticity, so that there is no 93 00:08:57.040 --> 00:09:03.240 change in the amount of money expended on A, there will be no effect on the demands 94 00:09:03.240 --> 00:09:08.000 for and the prices of the other goods. 95 00:09:08.000 --> 00:09:14.120 As the money economy develops and civilization flowers, there is a great expansion in the 96 00:09:14.120 --> 00:09:20.060 types of goods available, and therefore in the number of goods that can be substituted 97 00:09:20.060 --> 00:09:21.840 for one another. 98 00:09:21.840 --> 00:09:27.800 Consequently there is a tendency for the demands for the various consumer's goods to become 99 00:09:27.800 --> 00:09:36.200 more elastic, although they will continue to vary from highly elastic to highly inelastic. 100 00:09:36.200 --> 00:09:43.040 Insofar as the multiplication of substitutes tends to render demand for individual goods 101 00:09:43.040 --> 00:09:48.360 elastic, the first type of interaction will tend to predominate. 102 00:09:48.360 --> 00:09:55.840 Furthermore, when new types of goods are established on the market, these will clearly draw monetary 103 00:09:55.840 --> 00:10:03.860 demand away from other substitute products, and hence bring about the first type of reaction. 104 00:10:03.860 --> 00:10:09.700 The substitutive interrelations of consumers' goods were cogently set forth in this passage 105 00:10:09.700 --> 00:10:12.120 by Philip Wickstede. 106 00:10:12.120 --> 00:10:17.460 It is sufficiently obvious that when a woman goes into the market, uncertain whether she 107 00:10:17.460 --> 00:10:24.520 will or will not buy new potatoes or chickens, the price at which she finds that she can 108 00:10:24.520 --> 00:10:28.240 get them may determine her either way. 109 00:10:28.240 --> 00:10:33.980 For the price is the first and most obvious indication of the nature of the alternatives 110 00:10:33.980 --> 00:10:39.040 that she is forgoing if she makes a contemplated purchase. 111 00:10:39.040 --> 00:10:45.100 But it is almost equally obvious that not only the price of these particular things, 112 00:10:45.100 --> 00:10:50.040 but the price of a number of other things also will affect the problem. 113 00:10:50.040 --> 00:10:56.260 If good, sound, old potatoes are to be had at a low price, the marketer will be less 114 00:10:56.260 --> 00:11:09.740 If the housewife is thinking of doing honor to a small party of neighbors by providing 115 00:11:09.740 --> 00:11:15.140 a couple of chickens for their entertainment at supper, it is possible that she could treat 116 00:11:15.140 --> 00:11:20.940 them with adequate respect, though not with distinction, by substituting a few pounds 117 00:11:50.940 --> 00:11:57.840 be willing considerably to curtail their expenditure on other things in order to gratify them. 118 00:11:57.840 --> 00:12:04.060 Such parents may be willing to incur entertaining their guests less sumptuously than custom 119 00:12:04.060 --> 00:12:11.020 demands and, at the same time, getting French or violin lessons for their children. 120 00:12:11.020 --> 00:12:17.380 In such cases, the question whether to buy new or old potatoes or whether to entertain 121 00:12:17.380 --> 00:12:23.740 When friends with chicken or cod or neither may be affected by the terms on which French 122 00:12:23.740 --> 00:12:29.660 or music lessons of a satisfactory quality can be secured. 123 00:12:29.660 --> 00:12:35.420 While all consumers' goods compete with one another for consumer purchases, some goods 124 00:12:35.420 --> 00:12:39.180 are also complementary to one another. 125 00:12:39.180 --> 00:12:45.260 These are goods whose uses are closely linked together by consumers, so that movements in 126 00:12:45.260 --> 00:12:49.980 and demand for them are likely to be closely tied together. 127 00:12:49.980 --> 00:12:56.660 An example of complementary consumers' goods is golf clubs and golf balls, two goods the 128 00:12:56.660 --> 00:13:01.140 demands for which tend to rise and fall together. 129 00:13:01.140 --> 00:13:06.900 In this case, for example, an increase in the supply of golf balls will tend to cause 130 00:13:06.900 --> 00:13:13.720 a fall in their prices, which will tend to raise the demand schedule for golf clubs, 131 00:13:13.720 --> 00:13:18.680 as well as to increase the quantity of golf balls demanded. 132 00:13:18.680 --> 00:13:23.080 This will tend to increase the price of golf clubs. 133 00:13:23.080 --> 00:13:30.080 In so far then as two goods are complementary to each other, when the stock of A rises and 134 00:13:30.080 --> 00:13:37.480 the price of A therefore falls, the demand schedule for B increases and its price will 135 00:13:37.480 --> 00:13:39.800 tend to rise. 136 00:13:39.800 --> 00:13:45.760 Once a fall in the price of a good will always increase the quantity of the good demanded 137 00:13:45.760 --> 00:13:52.880 by the law of demand, this will always stimulate the demand schedule for a complementary good 138 00:13:52.880 --> 00:13:56.080 and thus tend to raise its price. 139 00:13:56.080 --> 00:14:03.640 For this effect, the elasticity of demand for the original good has no relevance. 140 00:14:03.640 --> 00:14:10.640 Summing up these interrelations among consumers' goods, among substitutable goods, if the stock 141 00:14:10.640 --> 00:14:20.800 of A rises and the price of A falls, and demand for A is inelastic, demand for and price of 142 00:14:20.800 --> 00:14:33.620 B, C, D, etc. rise, if stock of A rises and price of A falls and demand for A is elastic, 143 00:14:33.620 --> 00:14:39.980 Demand for and price of B, C, D, etc fall. 144 00:14:39.980 --> 00:14:48.360 If stock of A rises and price of A falls and demand for A is neutral, there is no effect 145 00:14:48.360 --> 00:14:52.520 on B, C, D, etc. 146 00:14:52.520 --> 00:14:59.960 Among complementary goods, if the stock of A rises, the price of A falls, and demand 147 00:14:59.960 --> 00:15:13.560 All goods are substitutable for one another, while fewer are complementary. 148 00:15:13.560 --> 00:15:19.180 When they are also complementary, then the complementary effect will be mixed with the 149 00:15:19.180 --> 00:15:25.100 substitutive effect, and the nature of each particular case will determine which effect 150 00:15:25.100 --> 00:15:27.880 will be the stronger. 151 00:15:27.880 --> 00:15:33.920 This discussion of the interrelation of consumers' goods has treated the effect only of changes 152 00:15:33.920 --> 00:15:37.760 from the stock or supply side. 153 00:15:37.760 --> 00:15:43.400 The effects are different when the change occurs in the demand schedule instead of in 154 00:15:43.400 --> 00:15:46.200 the quantity of stock. 155 00:15:46.200 --> 00:15:51.900 Suppose that the market demand schedule for Good A increases. 156 00:15:51.900 --> 00:15:58.420 This means that for every hypothetical price, the quantity of A bought, and therefore the 157 00:15:58.420 --> 00:16:02.420 amount of money spent on A, increases. 158 00:16:02.420 --> 00:16:09.560 But given the supply, stock, of money in the society, this means that there will be decreases 159 00:16:09.560 --> 00:16:14.320 in the demand schedules for one or more other goods. 160 00:16:14.320 --> 00:16:20.340 We omit at this point analysis of the case in which the increase in demand results from 161 00:16:20.340 --> 00:16:26.660 from Decreases of Cash Balance and or Decreases in Investment 162 00:16:26.660 --> 00:16:33.340 More money spent on Good A, given the stock of money, signifies that less money is spent 163 00:16:33.340 --> 00:16:37.820 on goods B, C, D, etc. 164 00:16:37.820 --> 00:16:44.260 The prices of these goods fall, therefore the effect of the substitutability of all 165 00:16:44.260 --> 00:16:51.980 All Goods for One Another is that an increased demand for A, resulting in a rise in the price 166 00:16:51.980 --> 00:17:02.500 of A, will lead to decreased demand schedules and falling prices for goods B, C, D, etc. 167 00:17:02.500 --> 00:17:08.180 We can see this relation more fully when we realize that the demand schedules are determined 168 00:17:08.180 --> 00:17:14.580 and by individual value scales, and that a rise in the marginal utility of a unit of 169 00:17:14.580 --> 00:17:22.700 A necessarily means a relative fall in the utility of the other consumer's goods. 170 00:17:22.700 --> 00:17:28.660 Insofar as two goods are complementary, another effect tends to occur. 171 00:17:28.660 --> 00:17:34.660 If there is an increase in the demand schedule for golf clubs, it is likely to be accompanied 172 00:17:34.660 --> 00:17:41.820 by an increase in the demand schedule for golf balls, since both are determined by increased 173 00:17:41.820 --> 00:17:45.020 relative desires to play golf. 174 00:17:45.020 --> 00:17:51.140 When changes come from the demand side, the prices of complementary goods tend to rise 175 00:17:51.140 --> 00:17:53.540 and fall together. 176 00:17:53.540 --> 00:18:00.700 In this case, we should not say that the rise in demand for A led to a rise in demand for 177 00:18:00.700 --> 00:18:07.660 for its complement b, since both increases were due to an increased demand for the consumption 178 00:18:07.660 --> 00:18:13.260 package in which the two goods are intimately related. 179 00:18:13.260 --> 00:18:19.900 In some cases, an old stock of a good may be evaluated differently from the new, and 180 00:18:19.900 --> 00:18:22.780 therefore may become a separate good. 181 00:18:22.780 --> 00:18:29.500 Thus, while well-stored old nails might be considered the same good as newly produced 182 00:18:29.500 --> 00:18:34.500 and Old Ford will not be considered the same as a new one. 183 00:18:34.500 --> 00:18:40.500 There will, however, definitely be a close relation between the two goods. 184 00:18:40.500 --> 00:18:45.500 If the supply schedule for the new Fords decreases and the price rises, 185 00:18:45.500 --> 00:18:49.500 consumers will tend to shift to the purchase of old Fords, 186 00:18:49.500 --> 00:18:52.500 tending to raise the price of the latter. 187 00:18:52.500 --> 00:19:00.200 Thus, old and new commodities, technologically similar, tend to be very close substitutes 188 00:19:00.200 --> 00:19:06.860 for each other, and their demands and prices tend to be closely related. 189 00:19:06.860 --> 00:19:12.780 Much has been written in the economic literature of consumption theory on the assumption that 190 00:19:12.780 --> 00:19:18.380 each consumer's good is desired quite independently of other goods. 191 00:19:18.380 --> 00:19:25.500 Actually, as we have seen, the desires for various goods are of necessity interdependent, 192 00:19:25.500 --> 00:19:31.980 since all are ranked on the consumer's value scales. Utilities of each of the goods are 193 00:19:31.980 --> 00:19:39.140 relative to one another. These ranked values for goods and money permit the formation of 194 00:19:39.140 --> 00:19:45.700 individual and then aggregate demand schedules in money for each particular good.