§ 2 (to Chapter VIII, § 8) Four Types of Commodities Contrasted

Let us assume four sorts of commodities which we may, for convenience, designate as wine, sugar, beef, and salt. We shall suppose that a reduction in the respective prices of these will have in each case a different effect on the sale. Accordingly we shall witness four possible effects on the general price level, following a reduction in the price of the four commodities respectively.

First, wine. This is assumed to be a commodity of such a sort that a reduction in its price will be accompanied by a more than proportionate increase in its sale. Thus the total amount of money expended for wine will be increased. This leaves a less amount with which to buy other commodities. In consequence, the prices of these other commodities, as well as of the wine itself, must fall.

Next, as to sugar. This is assumed to be such a commodity that a reduction in its price will be accompanied by an exactly proportionate increase in sales; so that the total money expended upon sugar will be unchanged. Under these circumstances the amount of money to be expended in exchange for other things will be neither increased nor decreased, and other prices will remain unchanged; but the general level of prices, including that of sugar itself, will be slightly lowered because the fall of one commodity, when others do not change, must produce some decrease in the average.

Third, as to beef. This typifies what is called a "necessary." We assume that a reduction in its price will be accompanied by an increase in consumption, but not sufficient to absorb all the money that was previously spent for it. The total expenditure for beef will thus be reduced, and in consequence there will be set free a certain amount of money to be expended for other goods, the prices of which will, therefore, in general, rise slightly. The net effect, however, will be an infinitesimal fall of general prices, including beef; for to the slight extent that there has been an increase of the total of goods sold by reason of the increase in the sales of beef, without any increase in the total amount of money spent, there must be a fall in the average prices.

Lastly, as to salt. This is assumed to be an "absolute necessary," so that a reduction in its price will not affect the amount sold. The result will be that the general price level will be unaffected, the fall in the price of salt being exactly offset by a compensatory rise in other prices, and the total volume of trade remaining unchanged.

We see then that the degree of fall in price level due to the fall in a single price may be great or small or nothing at all, according to circumstances.

In all of the four foregoing illustrations, it was assumed that the fall in the individual price originated in a change in the supply curve or schedule. If the fall in price originates in a change in the demand curve or schedule, there will in general be a rise in other prices and in the general price level, for, there being less of the particular commodity bought and that at a less price, there will be less spent upon it and therefore more on other commodities, the price of which will be higher and, as the reduction in the amount bought of the particular commodity will, in general, imply a reduction in the total volume of trade, the general price level will be raised.