CH. III. BOOK III. prices throughout the demand schedule for tea, and again the demand for gas is liable to be reduced by an improvement in electric lighting'. Other points to be postponed. Relation of the following to the preceding chapter. Again, a commodity may be simultaneously demanded for several uses (for instance there may be a "composite demand" for leather for making shoes and portmanteaus); the demand for a thing may be conditional on there being a supply of some other thing without which it would not be of much service (thus there may be a "joint demand" for raw cotton and cotton-spinners' labour). Again, the demand for a commodity on the part of dealers who buy it only with the purpose of selling it again, though governed by the demand of the ultimate consumers in the background, has some peculiarities of its own. But all such points may best be discussed at a later stage. Our next step will be to consider the general character of demand-schedules in the cases of some important commodities (of the First Order) ready for immediate consumption. We shall thus be continuing the inquiry made in the preceding chapter as to the variety and satiability of wants; but we shall be treating it from a rather different point of view, viz. that of price-statistics2. 1 The question where the lines of division between different commodities should be drawn must be settled by the convenience of the particular question under discussion. For some purposes it may be best to regard Chinese and Indian teas, or even Souchong and Pekoe teas as different commodities; and to have a separate demand schedule for each of them. While for other purposes it may be best to group together commodities as distinct as beef and mutton, or even as tea and coffee, and to have a single schedule to represent the demand for the two combined; but in such a case of course some convention must be made as to the number of ounces of tea which are taken as equivalent to a pound of coffee. 2 A great change in the manner of economic thought has been brought about during the present generation by the general adoption of semi-mathematical language for expressing the relation between small increments of a commodity on the one hand, and on the other hand small increments in the aggregate price that will be paid for it: and by formally describing these small increments of price as measuring corresponding small increments of pleasure. The former, and by far the more important, step was taken by Cournot (Recherches sur les Principes Mathématiques de la Théorie des Richesses, 1838); the latter by Dupuit (De la Mesure d'utilité des travaux publics in the Annales des Ponts et Chaussées, 1844), and by Gossen (Entwickelung der Gesetze des menschlichen Verkehrs, 1854). But their work was forgotten; and part of it was done over again and published almost simultaneously by Jevons and by Prof. Carl Menger in 1871. Jevons almost at once arrested public attention by his brilliant lucidity and interesting style. He applied the new name Final Utility so ingeniously as THE LAW OF DEMAND. to enable people who knew nothing of mathematical science to get clear ideas of the general relations between the small increments of two things that are gradually changing in causal connection with one another. His success was aided even by his faults. For under the honest belief that Ricardo and his followers had rendered their account of the causes that determine value hopelessly wrong by omitting to lay stress on the Law of Satiable Wants, he led many to think he was correcting great errors; whereas he was really only adding very important explanations. He did excellent work in insisting on a fact which is none the less important, because his predecessors, and even Cournot, thought it too obvious to be explicitly mentioned, viz. that the diminution in the amount of a thing demanded in a market indicates a diminution in the intensity of the desire for it on the part of individual consumers, whose wants are becoming satiated. But he has led many of his readers into a confusion between the provinces of Hedonics and Economics, by exaggerating the applications of his favourite phrases, and speaking (Theory, 2nd Edn. p. 105) without qualification of the price of a thing as measuring its final utility not only to an individual, which it can do, but also to "a trading body" which it cannot do. [These points are developed later on in a Note on Ricardo's Theory of cost of production in relation to value at the end of Book VI.] Dr Carl Menger's Grundsätze der Volkswirthschaftslehre, which, though not making use of mathematical language, is distinctly mathematical in tone, and appears to be in some respects, though not in all, further advanced than Jevons' work, and it is better balanced. A mathematical tone is even more clearly pronounced, though the use of mathematical formulæ is still avoided, in the writings of Prof. Böhm-Bawerk, who with Profs. Wieser, Sax, may rank among the other members of the brilliant Austrian School. Among the many recent writers on mathematical aspects of economics, special reference may be made to Prof. Walras, who was almost as early in the field as Jevons and Menger, to Profs. Pantaleoni, Edgeworth, and Wicksteed, to Drs Auspitz and Lieben, and to Dr Launhardt. 159 BOOK III. CH. III. BOOK III. CH. IV. of Elasti city of de mand. CHAPTER IV. LAW OF DEMAND CONTINUED. ELASTICITY OF DEMAND. § 1. WE have seen that the only universal law as to a person's desire for a commodity is that it diminishes, other Definition things being equal, with every increase in his supply of that commodity. But this diminution may be slow or rapid. If it is slow the price that he will give for the commodity will not fall much in consequence of a considerable increase in his supply of it; and a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case his willingness to purchase the thing stretches itself out a great deal under the action of a small inducement: the elasticity of his demand, we may say, is great. In the latter case the extra inducement given. by the fall in price causes hardly any extension of his desire to purchase: the elasticity of his demand is small. And as with the demand of one person so with that of a whole market. The ELASTICITY OF DEMAND in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price'. D p Fig. (3). 1 Speaking more exactly we may say that the elasticity of demand is one, if a fall of one per cent. in price will make an increase of one per cent. in the amount demanded; that it is two or a half, if a fall of one per cent. in price makes an increase of two or one half per cent. respectively in the amount demanded; and so on. The elasticity of demand can be best traced in the demand curve with the aid of the following rule. Let a straight line touching the curve at any point P meet Ox in T and Oy in t, then the measure of the elasticity at the point P is the ratio of PT to Pt. M T GENERAL LAW OF ELASTICITY OF DEMAND. 161 CH. IV. which is the con § 2. The price which is so high relatively to the poor BOOK III. man as to be almost prohibitive, may be scarcely felt by the rich; the poor man for instance never tastes wine, but the A price very rich man may drink as much of it as he has a fancy low relatively to for, without giving himself a thought of its cost. We shall therefore get the clearest notion of the law of the elasticity sumption of demand, by considering one class of society at a time. may be Of course there are many degrees of richness among the latively rich, and of poverty among the poor; but for the present the poor. we may neglect these minor subdivisions. of the rich high re to that of When the price of a thing is very high relatively to any class, they will buy but little of it; and even a very considerable fall in the price will cause no great increase in their consumption, i.e. the elasticity of their demand will be small. But if the price goes on falling, they will begin to consume the thing more freely, taking it perhaps into ordinary use; and the elasticity of their demand will increase. At last so low a price will be reached that they have got all that they want a satiety price; and then they will not be induced to increase their consumption much by any further fall: the elasticity of their demand will again have become small. That is to say, the elasticity of their demand is small when The genethe price of a thing is very high relatively to their means variation and again when it is very low: while the elasticity is much of the elasgreater for prices intermediate between what we may call demand the high level and the low level. ral law of ticity of sistent This rule appears to hold with regard to nearly all commo- is condities and with regard to the demand of every class; save only with great that the level at which "very high" prices end and "high" varieties of prices begin, is different for different classes and so again is the level at which "low" prices end and "very low" prices If PT were twice Pt, a fall of 1 per cent. in price would cause an increase of 2 per cent., in the amount demanded; the elasticity of demand would be two. If PT were one-third of Pt, a fall of 1 per cent. in price would cause an increase of 3 per cent. in the amount demanded; the elasticity of demand would be one-third; and so on. Another way of looking at the same result is this:-the elasticity at the point P is measured by the ratio of PT to Pt, that is of MT to MO (PM being drawn perpendicular to Om); and therefore the elasticity is equal to one when the angle TPM is equal to the angle OPM; and it always increases when the angle TPM increases relatively to the angle OPM, and vice versa. See Note III. in Appendix. detail. CH. IV. BOOK III. begin. There are however many varieties in detail; arising chiefly from the fact that there are some commodities with which people are easily satiated, and others-chiefly things used for display-for which their desire is almost unlimited. For the latter the elasticity of demand remains considerable, however low the price may fall, while for the former the demand loses nearly all its elasticity as soon as a low price has once been reached. This rule that the elasticity is great for medium prices and small for those which are very high or very low is seen most clearly when we select for observation a set of people, who, though sufficiently numerous to prevent individual peculiarities from obtruding themselves, are yet economically homogeneous; i.e. have nearly the same wants and nearly the same means of gratifying them. Our rule does. not show itself with so clear an outline, when we add together the demands of several such sets so as to get the aggregate demand of a larger group, as for instance that of the whole body of the rich, or the whole body of the middle classes, or the whole body of the working classes; and but faint traces of it remain when we add together the demands of these three groups so as to get the aggregate demand of the whole community1. 1 Let us illustrate by the case of the demand for, say, green peas in a town in which all vegetables are bought and sold in one market. Early in the season perhaps 100 lb. a day will be brought to market and sold at 1s. per lb., later on 500 lb. will be bought and sold at 6d., later on 1,000 lb. at 4d., later still 5,000 at 2d., and later still 10,000 at 14d. Thus demand is represented in fig. (4), an inch along Ox representing 5,000 lb. and an inch along Oy representing 10d. Then taking |