Interdependent Prices:
We have
discussed the determination of price and output of a firm (Market
Price) producing a single
commodity. We will be dealing now with the pricing of interconnected
commodities. Let us, first, take the pricing of jointly demanded goods.
Prices
of Jointly Demanded Goods:
When
goods are demanded jointly in order to satisfy a particular want or for
producing a certain commodity, they are said to be in joint demand. For
instance, pen and ink are needed for writing; ball, bat and wickets are demanded
together for playing cricket; masons, carpenters plaster, etc., are jointly
required for constructing a building. The commodities which are Jointly demanded
are also called complementary goods.
The
demanded for the final product in the Jointly demanded goods is called the
direct demand and the demand for various factors of production used for
making a final product is called the indirect demand or derived demand.
For instance, the demand for house is a direct demand, while the demand for
various raw materials and labor used in constructing the house is a derived
demand.
A demand
for the jointly demanded goods represent two types of relations:
(i)
Substitutive and (ii) Complementary.
(1)
Substitutive Relationship:
If two
commodities are close substitutes of each other, then the rise in the price of
one commodity will result in the rise in price of the other.
For
instance, if the price of tea rises, the price of coffee will also go up and
vice versa. Here, the concept of cross elasticity will be very useful for
measuring the mutual relationship of the demand for interrelated commodities.
The cross elasticity of the demand is measured with the help of the following
formula:
Formula:
Proportionate Change in the Quantity of Good X
Cross Elasticity = Proportionate Change in the Price Good Y
Here X stands for tea and Y for coffee.
(2)
Complementary Relationship:
When two
or more commodities are demanded jointly to satisfy a particular want, they are
said to be complementary goods.
For
instance, the demand for car is directly related
to the demand for petrol. Car as alone or petrol alone does not serve any useful
purpose. If the demand for cars increases, the price of the related goods, i.e.,
petrol will also go up. The extent of the price movement will depend on the
elasticity of demand, for car and the elasticity of supply of petrol.
Is a
factor of production in joint demand able to obtain higher price by withholding
its supply? In order to answer this question, we suppose the demand of cars
goes up and their prices rise. The direct result of the rise in prices of cars
will be that the prices of raw material such as steel, rubber, glass, etc., used
in manufacturing the cars will also go up.
But the rise in prices of each of
them will be affected differently depending upon their (i) conditions of supply,
(ii) elasticity of demand, and (iii) the possibility of varying it in
combination with other commodities.
First,
just to make it more clear, we take one item; say rubber which is in Joint
demand and see how its price is affected by rise in the price of the cars, if
its supply is withheld. Other things remaining the same, if the demand for
rubber is indispensable and there are no good substitutes available, then its
price will have a tendency to rise.
Secondly, if demanded for cars remains inelastic, i.e., a considerable
change in price is followed by a slight change or practically no change in the
quantity demanded, then the price of rubber will show upward trend.
Thirdly, if the price of rubber forms a small part of the total cost, then
its price can rise as the total cost is not very much affected by its rise and
the entrepreneur can afford to pay higher price for it.
Fourthly, if the demand for other co-operating factors is squeezable, i.e.,
it is elastic, then the price of the non-co-operative factor, i.e., rubber will
go
up.
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