This section gives several examples of the kinds of analysis made possible by the results of preceding sections, specifically looking at what happens when there is an increased demand for a product. (The next section will look at what happens when there is an increase in the supply of some factor of production.)
An increased demand for some product X will cause the price of X to rise and, in fact, will have a general tendency to raise prices "throughout the whole system." Unless X is "a commodity of very great importance," however, the observed price increases may not be significant except for those commodities that are "nearly related" to the product X, These commodities include factors employed in the production of X.
The increase in demand for X will only cause prices to decline for commodities that are "directly or indirectly complementary with X." The author divides the complements into three groups as follows:
(1) Commodities complementary with X in consumption -- if the demand for X rises without a corresponding increase in demand for one of these complements, such a complement's price will tend to decrease, although the author notes that, in practice, there may be an increase in demand that masks the tendency toward a price decline.
(2) Products complementary with X in production -- products produced jointly with X will increase in supply as X increases in supply. Again, absent an increase in demand for the complement, its price will fall. (The author refers to this as "the familiar text-book case of wool and mutton.")
(3) Factors regressive against X -- As noted earlier in the book, regression is more plausible in the case of joint production than when there is a single product. Here, the author notes that if any of the joint products are substitutes for X, their production will decrease, and hence the demand for factors needed to produce them may decrease as well.
The indirectly complementary commodities mentioned earlier are "either substitutes of the direct complements, or complements of the direct substitutes (whose prices rise)." The latter includes such commodities as those that are "complements in consumption of other products whose prices had risen because they needed in their production some of the same factors as were needed for the manufacture of X." The former includes factors of production for commodities complementary in consumption with X, as well as products for which "production is facilitated" by the decreased prices of these factors.
For those commodities the author calls "remoter indirect complements," the overall prevalence of substitution in a system will tend to "swamp much indirect complementarity." Hence it is unlikely that their prices will fall.
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