Book 3, chapter 4: The elasticity of wants

§1. This chapter is famous, as Marshall is credited with popularizing the concept of “elasticity,” i.e., the measure of how fast (elastic) or slow (inelastic) your demand for a good changes in response to its price changing.

§2. He adds that income affects price elasticity, as a rich man is not as worried about a price change as a poor man. (This concept led to, or referred to, “income elasticity”.)

Marshall states that elasticities fall as prices head to zero, contrary to modern economic assumption that they rise (such that infinite quantity is demanded). The difference is explained in his reference to “satiation,” meaning that you would not want more, at any price. This concept is often set aside, via “non-satiation” assumptions, in modern economic theory, probably to allow for easier mathematical assumptions.

Marshall allows for such [unlimited] elasticities in the case of “display goods” but these are often NOT cheap. Hm.

§3. Marshall shows (figures and tables) how aggregate elasticity is composed from the elasticities of various classes: The poor have inelastic demand for basics; the middle class has elastic demand for status goods; the rich have elastic demand for goods that display “social distinction”.

§4. Marshall discusses how elasticity is weak in the short-run for some basic goods (wheat, fish), in the sense that lower/higher prices don’t really affect demand. Years ago, I wrote a paper on demand curves [pdf], and loved this quotation:

“There may be even more violent changes than this in the price of a thing which is not necessary, if it is perishable and the demand for it is inelastic: thus fish may be very dear one day, and sold for manure two or three days later” [p 90].

But wait! Marshall brings up water (my favorite topic 😉

“Water is one of the few things the consumption of which we are able to observe at all prices, from the very highest down to nothing at all. At moderate prices the demand for it is very elastic. But the uses to which it can be put are capable of being completely filled: and as its price sinks towards zero the demand for it loses its elasticity” [p90].

On the one hand (wait, can’t say that!). Right. So Marshall talks about the very real elasticity of demand for water. He’s also right about demand not rising too much when water is cheap or free in some circumstances. In an English house, that’s probably true, but it’s not true when people add lawns, irrigate crops where there’s no rain, or where water is scarce and thus rivers, aquifers, and lakes are drained for human uses, because the price of extraction is low or non-existent.

Ahhh… he’s onto me:

“Generally speaking those things have the most elastic demand, which are capable of being applied to many different uses. Water for instance is needed first as food, then for cooking, then for washing of various kinds and so on. When there is no special drought, but water is sold by the pailful, the price may be low enough to enable even the poorer classes to drink as much of it as they are inclined, while for cooking they sometimes use the same water twice over, and they apply it very scantily in washing. The middle classes will perhaps not use any of it twice for cooking; but they will make a pail of water go a good deal further for washing purposes than if they had an unlimited supply at command. When water is supplied by pipes, and charged at a very low rate by meter, many people use as much of it even for washing as they feel at all inclined to do; and when the water is supplied not by meter but at a fixed annual charge, and is laid on in every place where it is wanted, the use of it for every purpose is carried to the full satiety limit” [p91]

He even mentions drought, so he probably considered my “some circumstances” comment above!

§5. Marshall explains that time, income, prosperity, and so on impact elasticity. Economists often invoke ceteris paribus to ignore these factors.

§6. Marshall adds that demand fluctuates with fashion, substitutes, complements, and — often overlooked — familiarity and market development. He discusses how coal replaced wood/charcoal, and was likewise displaced by petroleum. These dynamics are driven by prices but those reflect the increasing range of uses for petroleum, which make it simultaneously more attractive and cheaper to gain utility from.

Elasticity also varies with a good’s replacement rate. A change in the price of shoes (replaced annually) will not have a big impact compared to a change in the price of meat (purchased daily). Toilet-paper hoarders will  learn these dynamics if they try to sell off their stockpiles!

§7. Marshall adds more caveats for the variety of buyers and sellers (more of each increases competition and information) and the difference between wholesale markets for traders and retail markets for consumption.

§8. Marshall ends the chapter with what seems an outdated discussion of how merchants have a much better notion of the separate components contributing to demand (weather, wealth, holidays) as well as the difficulties of explaining how different classes demand different “baskets” of goods. Both concerns are often overlooked by modern economists focussed on single aggregated numbers, which is a pity for those who want to understand what actual (not median) people are doing.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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