In this short section, the author reviews the analysis of changes in commodity prices, addressing the cases in which the price change is, or is not, expected to be permanent. The purpose of this review is to set up the analysis of changes in rates of interest, which he discusses in the next section.
His analysis begins with the case in which the price of some commodity X rises, and the effect is expected to be permanent (and interest rates do not change).
There will be a substitution effect against X in favour of other goods; and there will be an income effect, which must also run against X, save in the exceptional case where X is an inferior good. ... But ... there is no definite rule about the way in which the reduction in demand will be spread over time.
The next case he considers is that in which the rise in the price of X is not expected to be permanent. In this case, "the income effect will usually be very slight or indeed quite negligible. The substitution effect, however, may well be much more considerable than in the preceding case." The reason for this is that the consumer may choose to substitute both other commodities, as well as future consumption of X, for current consumption of X.
The final case he discusses is that in which "the price of X rises, and this rise is interpreted to mean that the price will rise still further in the future (elasticity of expectations greater than unity)." Depending on the level of the elasticity of expectations, this rise in the price of X could actually lead to an increase in current demand for X (from both substitution and income effects). The author notes that "This is the familiar case of speculative demand."
