LATEX

LATEX

Tuesday, September 29, 2015

Value & Capital, CHAPTER III -- COMPLEMENTARITY, Section 4

In this section Hicks elaborates on a few details about substitution effects, noting, to begin with, that the substitution being discussed in the context of complementary and competitive goods is exactly the same thing as the substitution discussed in earlier chapters.

When the consumer is choosing consumption amounts of two (and only two) goods, then the goods must necessarily be substitutes.  It is only when there are more than two goods involved that other kinds of relations among them become possible.  Hicks notes that this explains why complementarity cannot be represented on an indifference diagram for two goods, "for X and Y can only be complementary if there is some third thing at whose expense substitution in favor of both X and Y can take place."  A complementary group of commodities requires something outside the group for them to be substituted against.

So with multiple goods it is theoretically possible, in an extreme case, that all but one good could form a complementary group, with each good in the group being a substitute for the one good outside the group.  At the other extreme, there may be no complementary goods at all.  Hicks notes that it will usually be the case that a good will have a relatively small "knot" of other goods that are complementary with it, but "its most probable relation with any other good taken at random will be one of (doubtless mild) substitutability."

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